What’s in Store for the 2009 Holiday Retail Season?
With roughly 20% of their revenue derived during the short holiday shopping season, retailers have a significant stake in the outcome of this busy period.
Should See Some Rebound
The consumer environment during the 2008 holiday shopping season was very challenging, as tightening credit and rising unemployment drove a 5.3% retail sales decline. We believe this year will show some rebound. News suggesting the economy is on the mend helps improve consumer confidence. We’re forecasting a 1.3% increase in 2009 holiday spending, below the 3.2% average growth we’ve seen in the past 10 years, reflecting the following challenges consumers still face:
- Unemployment that remains at elevated levels
- Lower home prices
- Consumer debt levels that will take time to pay down
Promotional, as Always
While sales promotions always heat up around the holidays, retailers were ill-prepared for last year’s softening environment. Inventories were too high, and consumers deferred their holiday purchases, resulting in intense discounting and poor profitability. While we believe this year’s sentiment is better, we still expect this value-conscious mindset to prevail. We also believe retailers are well-prepared, planning their inventory conservatively.
The Hot Product Categories
Similar to previous years, we expect the popular gift categories will include consumer electronics, apparel and toys. While gift cards will likely make popular last-minute gifts, their popularity has declined as consumers tend to view them as impersonal gifts.
Profits Should Rebound
While we believe the holiday spending will likely rebound only slightly this year, we think the outlook for profits is much better for retailers. We expect this will come mainly from better inventory markdowns. We expect the profit recovery to continue into 2010 as economic conditions likely continue to show improvement.
Risks/Valuation
An extended recession with high unemployment represents the single biggest risk to retail stocks.*
Talk with your financial advisor about our current retail stock recommendations.
Matt Arnold, CFA
Consumer Analyst
*In valuing retail shares, we use various methods including price-to-earnings (P/E) and discounted cash flow analysis.
