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Retailers Bracing For Another Unfestive Holiday

Posted: Oct 12, 2009 13:54 PM by Kristin Graham

Tickers in this Article: ANF, FOSL, COH, TGT, WMT

The great burst of optimism that has been priced into the retail sector over the past few months may allude to an assumption that retailers are in for a stellar holiday season. Unfortunately, that's not the case.

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The Recession That Stole Christmas
The NRF released its 2009 holiday forecast this week and is projecting holiday retail sales to fall 1% to $437.6 billion. While that doesn't sound as chilling as last years 3.4% drop, it's far from the 3.39% growth retailers have averaged throughout the last decade. And really, it's hard to say just how accurate that estimate really is. Last year the NRF forecasted 2.2% growth.

On the surface, retailers appear better prepared for this year's dismal holiday season. Most have cleaned up their stockpiles of excessive inventory and are operating much leaner business models. Yet, the retail sector still faces significant challenges, beyond the general expectation of consumer stinginess.

The Challenges
While inventory reduction was imperative to avoid the massive oversupply that occurred last year, retailers dramatically cutting back inventory run the risk of not offering the "right" merchandise. Leaner inventory translates into less product offering, meaning retailers need to be on their toes and understand exactly what their target customers want.

In other words, this year, it's not just about the ability to properly align inventory levels with sales; retailers must also be precise in predicting exactly what shoppers want to purchase as reduced inventory levels won't provide shoppers with the multitude of offerings they have become accustom to.

Retailers are also going to have tough time selling shoppers on full-priced merchandise. Last year's stiff competition for scarce discretionary income resulted in heavy promotional activity before the official holiday shopping season began. And consumers were further rewarded with up to 70% off discounts post holiday shopping due to inventory mismanagement. Thus, it's likely many will hold off on holiday purchases if 2008 prices aren't offered.

Trends to Expect
The consensus is that consumers will be trading down for the holidays and that discounters like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) will be the main winners. While that's true to a certain extent, we will see another trend emerge - some consumers trading up.

Right now, consumers are either so strapped for cash that they have no choice but to trade down, or they can afford to purchase luxury items, just in limited quantities.

There are a lot of upper-class consumers that may be willing to tiptoe back into the luxury market and splurge on a luxurious item. Of course, practicality will remain a driving force in these purchases and so companies like Coach (NYSE:COH) and Fossil (Nasdaq:FOSL) which offer accessories that can be worn or used on a daily basis will be more popular gifts.
Obviously, shoppers still are seeking deep values in the purchases they make. However, they also desire quality. We'll see consumers go to either extreme. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)

The Bottom Line
It's undoubtedly going to be another depression holiday season for retailers and could be potentially fatal for some of the bigger strugglers. Companies like Abercrombie & Fitch (NYSE:ANF) who have been posting double-digit sales declines may have been financially strong enough to leverage plummeting sales over the past year, but they can only take so much battering.

It's possible that the retail sector's competitive landscape will shrink as 2010 rolls around from companies that can't sustain persistent negative sales growth. Those that want to stay in the game certainly have their work cut out for them over the next few crucial months of holiday shopping.

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By Kristin Graham

Kristin Graham is an equity analyst with experience in covering retail and consumer stocks. She obtained a unique global perspective by sailing around the world on the Semester at Sea study abroad program. She also specializes in global equities and international investing. Graham is a Level III CFA candidate.

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