The early numbers for holiday retail sales -- real numbers, not forecasts -- are coming out now, and they are coming in better than expected. But keep in mind that the bar has been set pretty low after four years of recessionary shopping.
Thanks to a last-minute push during Christmas week that sent sales up 4.5% over the same time last year, the International Council of Shopping Centers is expecting December sales will be 3.5% to 4% above 2010's. That's good news for investors looking at the retail sector, and may indicate there really is a "new normal."
That's where things get interesting for mass merchants. They have all the main trends in their favor -- unemployment is down below 9% and consumer confidence is up, according to the latest Conference Board numbers. But retailers are still struggling with rising costs and tight-fisted consumers squeezing their margins. This has been the takeaway from 2011, and will likely be the same for 2012.
The luxury consumer is back, no questions asked. But catering to the 99% -- even with their declining wages -- is the consumer segment, where many big-boxes make their money. Unfortunately, those consumers are not shopping like they did before the recession. Those shoppers are limiting themselves to necessities, shopping around, and holding out for sales like they did during the downturn. In a Deloitte holiday shopper survey, 86% said they are more precise in what they buy and 80% said they are more efficient in getting in and out of stores than they were a year ago.
Just before the last holiday-shopping rush, Thomson Reuters analyzed results and forecasts for a whole slate of retailers and concluded that luxury retail is the segment to be in as the year winds down. This segment has had an easier time maintaining pricing power, while other stores have had to rely on discounts, and therefore squeezed margins. The recession has retrained many shoppers to look for an even better deal. To meet this demand, many retailers have to rely on discounts to lure shoppers, so even growing sales won't necessarily guarantee higher profits.
Even Wal-Mart gets marked down
Wal-Mart Stores (NYSE: WMT ) , which gained in the early days of the recession, now is losing market share to dollar stores such as Family Dollar and Dollar General (NYSE: DG ) , and it's not expected to show year-over-year earnings growth in the next four quarters, according to Thomson Reuters' analysis. Meanwhile, the dollar stores are expected to show 4.2% same-store sales growth or better in this quarter, on top of good sales the same time a year ago.
Among the lesser lights of mass retail, enough has been written on the troubles of Sears Holdings (Nasdaq: SHLD ) , which recently announced 100 to 120 store closings, that there is no need to pile more on. The main story line is that Sears and Kmart are getting squeezed by their own lackluster operations, dingy stores, and soft consumer dollars.
Among mid-price department stores, J.C. Penney and Kohl's (NYSE: KSS ) are the two leaders, with Sears bringing up the rear. The ICSC is estimating that Kohl's and J.C. Penney will see same-store sales grow 3% in December over last year, with Target up 3.5% and Macy's up 4%; meanwhile, Sears and Kmart same-store sales were down through Christmas.
But Target, Penney, and Kohl's have all struggled over the last two years with rising costs -- of labor in China, and of cotton and other materials worldwide -- and with trying to pass them on to consumers in the form of higher prices. Shoppers have pushed back. Even with cotton prices abating, many of these difficulties are likely to persist for retailers through next year.
Macy's (NYSE: M ) , which has one foot in the moderate department store segment and another in the luxury end thanks to Bloomingdale's, is one department store chain to watch. It has been reworking its debt in recent years, and Wall Street observers expect share repurchase activity in 2012. Consensus estimates put the company's fourth-quarter earnings at $1.62 per share, up 3.2% from last year.
Investors without strong stomachs should stick to the luxury names for now, such as Nordstrom and Saks, two companies that have taken the downturn's lessons and applied them to merchandising and operations. They have used the last three years to figure out how to stock just enough items to avoid relying on big sales later, how to combine selling products online and on the floor, and how to work technology into their operations to keep costs down. Both are trading closer to their 52-week lows than their highs, and could have a lot of upside from here.
There are likely no explosive growth stories in domestic retail for next year. Investors who want to be in this sector will have to have patience -- and sometimes maybe even a strong drink. But Wall Street analysts expect Macy's full-year earnings will be higher than last year's, and there is talk of a share repurchase.
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