November 20, 2017

U.S. Retailers Pin Hopes on Black Friday

by Jharonne Martis

Black Friday – the day after the U.S. Thanksgiving holiday — is one of the most critical retail sales days during the holiday season, and for some it can make or break their fourth quarter profits. Supposedly, it turns red ink into black on the ledgers, thus the name.

Here are some highlights as we head into this year’s Black Friday season:

  • Of all retailers, department stores might be relying the most on having a great Black Friday to match and or exceed their quarterly estimates.
  • The current average merchandise discount is 37.3% and it’s been at this level for months, Thomson Reuters discovered in a collaboration with StyleSage Co.
  • About 60% of the merchandise at mid-value stores will also be on sale this year compared to last, which could further continue to hurt profits.
  • With the exception of the value driven retailers, there aren’t any major changes from one year ago when it comes to the average discounts, nor the discount penetration (how much of the assortment is on sale).
  • The Thomson Reuters Same Store Sales Index is looking at a 1.6% growth estimate for the holiday season.
  • The Thomson Reuters Retail and Restaurant Index fourth quarter earnings are expected to rise 5.6% for from Q4 2016.
  • For Q4 2017, there have been 31 retail negative EPS preannouncements, compared to 6 positive.

Below is last year’s Same Store Sales (SSS) performance for the weakest sectors. Although these sectors are all weak, the Apparel, Footwear, and Health and Wellness sectors have shown slight signs of improvement throughout 2017. On the flip side, the Sporting Goods group has been on the decline. However, department stores have consistently remained below -2% SSS, suggesting they might be struggling the most, and might be relying the most on having a great Black Friday to help Q4 sales.

Exhibit 1: Weakest performing SSS Sectors: 2016 – 2017

Source: Thomson Reuters I/B/E/S

Negative surprises

Yet despite the need to beat earnings estimates, it is evident from the StarMine SmartEstimate that these retailers are nowhere close to doing so. On the contrary, according to StarMine SmartEstimate, the bulk are likely to post results in line, or miss Thomson Reuters estimates this holiday season. JC Penney, for example, has a negative predicted surprise of -7.2%, suggesting that the company is likely to miss its earnings estimate of $0.44, and post a negative surprise.

Exhibit 2: JC Penney StarMine SmartEstimate

Source: Thomson Reuters Eikon

Online deals vs. last year

About 60% of the merchandise at department stores such as Macy’s and Lord & Taylor will also be on sale this year compared to last, which could further continue to hurt profits.

Retailers have been ramping up their Black Friday promotions and emailing everyone about the upcoming deals. However, the average promotional discount hasn’t changed over the last two months, as Thomson Reuters discovered in a collaboration with StyleSage Co., which analyzes retailers, brands, online trends and products across the globe.

Thus, the email discounts shoppers are receiving haven’t changed over the last two months. In fact, the current average discount is 37.3% and it’s been at this level for months.

However, what is changing is the frequency with which retailers are engaging in promotional messaging. StyleSage Co. saw an increase over the last four weeks of 42% in the number of emails being sent out, and a 12% increase in the number of active promotions.

Currently, there are more category-focused promotions rather than blanket ones for Black Friday and Cyber Monday. Based on historical trends, it is anticipated that those will turn into site-wide discounts.

Digging deeper into the item-level discounts, it is evident that with the exception of the value department stores, there aren’t any major changes from one year ago when it comes to the average discounts, nor the discount penetration (how much of the assortment is on sale). Let’s look at the data by sector.

Value stores

Notice how the discount penetration dropped from last year’s 43.2% to 25.7% this year (Exhibit 3). This means that there are fewer items on sale this year vs. last within this sector. This could also be a positive sign that perhaps these stores made better assortment buys for this holiday season. The average discount amount has also dropped from 18.1% to 10.5% this year, indicating that discounters are proactively trying to improve margins.

Exhibit 3: Value Sector Discount Penetration and Average Discount 2016 vs. 2017

Source: StyleSage, Co.

Mid sector

This sector has experienced a slight drop in discount penetration — 66.7% in 2016 to 60% this year. However, over half of inventories are on sale. That’s extremely high and the question is how long this sector can maintain these high discount levels, which come at the expense of margins. Similarly, the average discount hasn’t dropped much — 24.1% this year from 26.8% last year.

Exhibit 4: Mid Sector Discount Penetration and Average Discount 2016 vs. 2017


Source: StyleSage, Co.

Premium sector

As expected, there aren’t any meaningful changed in this sector. Both metrics remain pretty much unchanged, and saw the lowest levels of discounting. The discount penetration level is slightly up from 22.6% to 24.3% this year. The same can be said for the average discount level which has moved from 8.7% to 10.2% this year.

Exhibit 5: Premium Sector Discount Penetration and Average Discount 2016 vs. 2017

Source: StyleSage, Co.

Everyone is concerned about what is on sale, but what’s interesting is what’s not on sale. StyleSage Co. data show that such popular holiday items as sleepwear/intimates, jeans and activewear have the lowest discount levels going into the holiday weekend. This suggests that retailers are luring shoppers in with other promotions, and hoping they will pay full price for those hot holiday gift items. If they are successful, this can help improve margins.

Competition: department store vs. off-price

Consumers are very much enticed by promotions and discounts and the value proposition is very important to them. They also still want designer clothing for less. Thus, off-price retailers like TJX Companies, and Ross Stores have been outperforming the department sector for some time now. This holiday season is no exception. TJX and Ross are both expected to post a 2.5%, and 2.2% SSS growth for the holiday season (Exhibit 6).

Exhibit 6: Q4 2017 Same Store Sales – Department Stores vs. Off-Price Retailers

Source: Thomson Reuters I/B/E/S

Q4 holiday guidance

Retailers just reported Q3 earnings, and blamed natural disasters and weather for missing earnings and revenue estimates. As a result, a number of them lowered guidance for the holiday season. For Q4 2017, retailers seem a bit more bearish compared to last year. To date, there are 31 negative EPS preannouncements issued by retailers and six positive vs. nine this time last year (Exhibit 7).

Exhibit 7: Holiday Earnings and Revenue Guidance Q4 2017 vs. 2016

Source: Thomson Reuters I/B/E/S estimates

Thomson Reuters – Holiday Sales Forecast

Overall holiday sales are expected to be stronger than a year ago. The Thomson Reuters Same Store Sales Index is looking at a 1.6% growth estimate for Q4 2017. While the 1.6% SSS estimate is twice as big as last year’s 0.8% SSS result, it’s still below the 3% healthy mark, suggesting spending will be modest. Still, both the discounters, and specialty sectors are expected to post the strongest SSS growth.

Exhibit 8: Same Store Sales Sectors – Q4 2017 vs. Q4 2016

 

Source: Thomson Reuters I/B/E/S

Same Store Sales winners

Cosmetic and fragrances are top gifts during the holiday season, and Ulta Salon has the strongest SSS in our retail universe at 9.4%. Shoppers will also gravitate to Costco for everything from groceries, gifts, and home goods, and is expected to post a 7.2% SSS. Meanwhile, Home Depot continues to benefit from those repairing their houses after the natural disasters, and the strong housing market trend. As a result, it is expected to register a 6.3% SSS. Similarly, Ethan Allen is also expected to report a healthy 4.8% SSS, while Lululemon has a healthy 4.4% comp estimate.

Exhibit 9: Top SSS estimates – Q4 2017

Source: Thomson Reuters I/B/E/S

The retailers with the weakest SSS estimates are suffering from company-specific issues. Sears has been struggling for some time, and has the weakest SSS estimate for the holiday season at -10.5% SSS estimate. Meanwhile, Guess and Chico’s fashion have been out of favor for some years now, and have an -8.2%, and -7.1% SSS, respectively.

Exhibit 10: Bottom SSS estimates – Q4 2017

Source: Thomson Reuters I/B/E/S

Earnings growth – holiday season

The Thomson Reuters Retail and Restaurant Index fourth quarter earnings are expected to rise 5.6%, below the 10.1% growth seen in Q4 2016.

When looking at the earnings growth rates for the holiday season for the 218 retailers tracked by Thomson Reuters, the Internet sector continues to have the highest earnings growth rate (13.8%) of any sector. Six of the ten retailers in the sector are anticipated to see higher earnings than a year ago. Netflix (176.7%) and Nutrisystem (38.4%) have the highest EPS growth in the sector.  Amazon is also on track to see a 19.4% jump in earnings.

On the other hand, the Textiles, Apparel & Luxury Goods group sector has the lowest growth rate (-8.0%) of any sector. Ten of the 22 retailers in the sector are anticipated to see earnings decreases compared to Q3 2016, led by Under Armour (-100.0%) and Iconic Brand Group (-77.2%) sub-industries.

Exhibit 11: The Thomson Reuters Retail Earnings Growth Rate – Q4 2017

Source: Thomson Reuters I/B/E/S Estimates.

Online sales

Online retailers, especially Amazon, have been a threat to traditional brick-and-mortar stores. As a result, department stores started to partner up with online giants, while Amazon and Walmart continue to expand their marketplace portfolio. Online has shaped the traditional Thanksgiving/Black Friday shopping period. Consumers are all about instant gratification, and getting the products delivered just-in-time. Retailers that offer these capabilities will outperform this holiday season. As a result, the Internet & Catalog Retail sector has the strongest estimated Q4 2017 earnings growth rate at 13.8%.

E-commerce transactions still make up only a fraction of total retail sales; 8.9% as of the end of the second quarter, compared to 4.2% in early 2010 – but they have changed shopping patterns, and this likely will only increase with the passage of time. Comparison shopping for deals is now easier. As a result, the shopper is more conscientious about what he/she is purchasing vs. doing more impulse shopping.  Notice how e-commerce dollar sales kept growing as a percentage of total sales, showing that the amount of money consumers spend online continues to grow rapidly for the most part (Exhibit 12).

Exhibit 12: E-Commerce As a Percent of Total Retail Sales: 1999 – Present

Source: Thomson Reuters Eikon

 

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