Don't look now, but Black Friday is only a week away. The anticipation must be killing a lot of eager holiday shoppers who are ready, willing, and -- importantly -- able to take advantage of what will assuredly be a promotional extravaganza across the retail landscape.
For many, Black Friday shopping is a rite of holiday passage. For others, it is something they would take a pass on just as easily as they would take a pass on a piece of mincemeat pie.
We don't know where our readers stand on the matter, yet we do know this holiday selling season has the makings of being a really good one.
The National Retail Federation's 2018 holiday sales forecast calls for yr/yr growth between 4.3% and 4.8%, excluding sales of automobiles, gasoline, and restaurants. That compares favorably to an average annual increase of 3.9% over the past five years, although it should be noted that it is less than the 5.3% growth rate achieved in 2017.
To be fair, the forecast is off a larger base, so we wouldn't make too much of the projected deceleration in the growth rate.
Several economic signs point to a healthy pickup in holiday spending and a decent probability that things will be even better than expected when the final tabulations are made.
- The 3.7% unemployment rate is at a 49-year low.
- Real average hourly earnings growth isn't robust, yet it is higher than it was a year ago.
- Consumer confidence is close to an 18-year high, underpinned by favorable views about income expectations and job security.
- Notwithstanding the recent correction in stock prices and some softening in the housing market, the wealth effect is still intact. The S&P 500 (+2.5%) and Nasdaq Composite (+5.3%) remain higher for the year and reports indicate homeowners have a record amount of available home equity.
Aiming for Amazon
These economic points aside, Amazon.com (AMZN) seemed to upset the holiday sales outlook with fourth quarter revenue guidance of $66.5-72.5 billion that fell shy of analysts' expectations.
The midpoint of that guidance range translates to 14.9% yr/yr growth, which is a notable deceleration from the 36% growth rate Amazon reported last year, excluding currency impact.
In one respect, the law of large numbers is working against Amazon.com. In another respect, it is fair to argue that more retailers are in a better position to compete against Amazon.com this year, having stepped up their investments in online and mobile offerings, as well as distribution and delivery capabilities.
Amazon.com is still going to do just fine on an absolute basis, yet relative to past years it might have to hustle more to stay ahead of every other retailer aiming to chip away at its online market share.
Some think Amazon.com was addressing that reality on November 5 when it announced free shipping with no minimum purchase amount for all customers placing orders in time to arrive for Christmas. Amazon Prime members, who already enjoy free two-day shipping, were offered free same-day delivery on more than three million items.
That offer, by the way, came after Target (TGT) said in October it is offering free, two-day shipping with no minimum purchase amount between November 1 and December 22.
The point is that it is game-on for the retailers. It might not be a zero-sum game, but some are going to win more than others. The question is, will winning on the sales front come at the expense of the bottom line?
That answer won't be known officially until February or March (most retailers have a fiscal year that ends in January), yet the promotional cadence in December could provide some early clues.
In a Retail Rut
Strikingly, the retail stocks have not acted well in recent weeks.
Investors have been concerned about higher freight and wage costs pressuring profit margins, as well as the specter of tariffs leading to product price hikes that they may not be able to pass on to consumers.
Like most other stocks, the retail issues have also been subjected to concerns about more challenging comparisons in 2019 as the initial impact of the fiscal stimulus fades from their top- and bottom-lines.
The SPDR S&P Retail ETF (XRT) is down 12% from its August high, including a 4.5% decline in the past week following earnings reports from Walmart (WMT), Macy's (M), Nordstrom (JWN), and Williams-Sonoma (WSM) that failed to excite investors for reasons ranging from valuation concerns to margin pressure to inventory issues.
It's not the best posture going into what should be a really good holiday selling season, which suggests there is no margin for execution error in what will be an ultra-competitive business environment.
Hopefully, Mother Nature sticks to her execution script, too, and delivers the typical winter weather that drives the sale of jackets, sweaters, gloves, and seasonal merchandise at fuller prices.
If the weather takes a temperate turn, watch for selling prices to turn south and earnings concerns to heat up.
What It All Means
There is plenty of reason to think consumer spending will be strong this holiday season. If it isn't, that would be a surprise and it would certainly feed the concerns about the U.S. economy being at, or close to, peak growth.
Mother Nature will have some say in just how strong the holiday selling season is, yet the retailers have ample control over their own destiny and they will need to exercise that control effectively to capture wallet share at a time when the macro backdrop suggests consumers will have their wallet open a little wider this year.
The retailers that strategize well will have good news to share and good margin trends to reveal on their income statement. The retailers that don't will leave their investors stuck eating mincemeat pie.
(Editor's Note: The next installment of The Big Picture will be posted Friday, November 30)