On Revenues and Black Friday

I had been wondering what the word on Black Friday was going to be, then I ran across this story from NPR on Black Friday.  Like manna from Heaven, only if you think manna is in the form of a news story to blog about.

At any rate, here’s what the story had to say:

This year retailers did their best to lure consumers to open their wallets with lots of early-morning specials. But while the economy has shown some signs of an improvement, analysts say the high rate of unemployment is weighing on people’s willingness to spend.

Well color me surprised.  Actually, don’t.  How this qualifies as news given that we have  unemployment over 10% and wages that are still falling is beyond me.  It’s not like we could expect to have a Christmas like we did 3 or 4 years ago, despite the price action in the equity markets.

But numbers in a vacuum mean very little.  What about the comparison to last year?

The National Retail Federation predicts sales will be down 1 percent this holiday season compared with last year. The 2008 holiday sales season was rough for retailers, who were caught off guard by recession-driven frugality. This year, Edwards says, they seem ready.

“They did a phenomenal job, as best I’ve been able to tell, of buying at the right price so that it appears to the consumer to offer great value, but also provides decent margins to the retailer,” she said, adding it is a change from last year when there was “really a smell of fear in the air when you walked into any of the stores and the consumers knew that they had the retailers right where they wanted them.”

This is important because ultimately what we care about in looking at retail is a mosaic of things: sales volumes, prices, and margins.  So it sounds like – at least on the surface – there’s something to be optimistic about.  But let’s flashback and see what everyone felt about last year’s holiday retail season.  From the New York Times on January 8:

Industry sales fell 2.2 percent for the holiday shopping season, the biggest decline since at least 1970, according to the International Council of Shopping Centers. December sales dropped 1.7 percent on top of even-weaker November sales, when chains posted a 2.7 percent decline, the council said.

Those numbers would be worse except for some huge categories, like food and beverages, on which consumers were less likely to cut back.

So the only thing to be really optimistic about for a lot of retailers is that this season they’re prepared for a horrid retail season.  Because remember: the forecast is for a 1% decline from last year’s sales which had the biggest decline seen in their data for almost 40 years.

That’s not to say it will be uniformly bad for all retail.  Some will do better if they have unique products, great service, or they cater to a market with hardcore shoppers/fans.  But the prognosis still isn’t good when you see things like this in the NPR report:

Another unlikely big seller: kids’ pajamas for $5. Bernadette Carter had a pile of them in her cart that she planned to give to nieces and nephews as presents.

“Normally I’d spend $20 a kid. This year I’m doing $5 a kid. I know that’s cheap but at least they get a little something,” she said.

And this:

“Those price points just grab you. Like anything that’s $10 or less and it’s something neat and would make a great gift,” he said. “People are just going to jump on a price point.”

Margins on low cost items tend to be higher, which helps, but this holiday season I think we might see some margin compression at retailers.  It may not be a huge compression that we see, but it does point to a less jolly holiday profit forecast (Oh dear God, did I just go there?  Jolly?  Really?).  Plus, you still need top line revenue, because that’s what The Street really rewards.  Kind of hard to get there if you’re selling a lot of $5 & $10 items, so having the right product mix will be crucial.

But the most telling part of the story?

So, instead of paying with credit, she went with debit — right out of her checking account.

Consumers won’t leverage up the way they used to.  The real estate ATM is permanently damaged, jobs are more scarce and they pay less, too.

So the bloodletting in retail continues… and not just from me tripping unsuspecting shoppers at the mall.

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Filed under finance, macro, Markets, Way Forward

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