November 12, 2018

Forecast Sees Soft U.S. Holiday Retail Sales

by Jharonne Martis and Melissa Gonzalez from The Lionesque Group.

The U.S. Thanksgiving holiday on Thursday, Nov. 22 kicks off the retail Christmas holiday season. We look at some trends shaping up for the retail year’s make-or-break fourth quarter.

The Refinitiv Same Store Sales Index posted an impressive 3.9% average for the first half of 2018. However, it looks like consumer spending might slow down from the previous two quarters (Q3 and Q2) into Q4. For Q4 2018, the Refinitiv Same Store Sales Index is looking for a 3.0% growth, slightly below the 3.1% SSS Q4 2017 result. Despite a slight slowdown, a 3.0% SSS still reflects healthy U.S. consumer spending.

Thanksgiving is always the fourth Thursday in November. It’s early this year, adding some selling days before Christmas. Therefore, retailers will be forced to plan additional sales promotions to create momentum. Department stores might be relying the most on having a great holiday season to match or exceed their fourth quarter earnings estimates, and it looks like cosmetic , fragrances, and toys will be top gifts.

Tariffs and trade are areas of concern for retailers, and are being mentioned on earnings calls. Retailers have started reporting Q3 2018 earnings, and in the month of October, 25 of them have mentioned tariffs during the earnings call.

Looking toward Q4, retailers seem a bit more bearish compared to last year. To date, there are nine negative EPS preannouncements and only one positive.

This holiday season there will be a focus on experiential retail as Refinitiv discovered in a collaboration with retail strategists, The Lionesque Group. Collaboration is king and a number of retailers are partnering in order to stay relevant and afloat. There are several standouts this season.

Retailers are investing significantly in technology and will push to be creative on how they’re reaching consumers and where they’re reaching consumers. With retailers vying to pick up Toys R Us market share, retailers aren’t just allocating shelf space to the category, they are investing in social campaigns with influencers, investing in more creative “meet Santa” moments and planning a robust in-store calendar of events.

Retail Same Store Sales

The Refinitiv Same Store Sales Index posted an impressive 3.9% average for the first half of 2018. The strong economy and employment market have all fueled positive consumer confidence. Consumers felt good about their economic situation and spent more freely this year. However, it looks like consumer spending might slow down from the previous two quarters (Q3 and Q2) into Q4. The holiday SSS forecast is in line with last year’s results. For Q4 2018 the Refinitiv Same Store Sales Index is looking for a 3.0% growth, slightly below the 3.1% SSS Q4 2017 result. Despite a slowdown a 3.0% SSS still reflects healthy U.S. consumer spending.

Exhibit 1: The Refinitiv Same Store Sales Index:  2017 -2018

Source: I/B/E/S data from Refinitiv

Early Thanksgiving impact

Black Friday (the traditional day for big discount sales) is Nov. 23 and stretches the Christmas selling period over five weekends. In some markets, Hanukkah will amplify early sales since that eight-day holiday begins on Sunday, Dec. 2. With even more selling days before Christmas this year, retailers will be forced to plan additional sales promotions to create momentum.

Department stores might be relying the most on having a great holiday season to match and or exceed their fourth quarter earnings estimates. Black Friday 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.

Below is the retail sector’s Same Store Sales (SSS) performance over the past two years. Consumer confidence has been strong in 2018 which is evident in the improvement we’ve seen with the SSS sectors. The Discount and Specialty sectors remain the strongest performing groups. On the flip side, the Department Store sector is the weakest performer, but has shown signs of improvement and is on track to post its third consecutive quarter of positive SSS for Q4 2018. Still, it is the weakest performing sector, suggesting department stores are struggling the most, and might be relying the most on having a great Black Friday to help Q4 sales.

Exhibit 2: The Refinitiv Same Store Sales Sector Indices:  2016 -2018

Source: I/B/E/S data from Refinitiv

Same Store Sales winners

Cosmetic and fragrances are top gifts during the holiday season, and Ulta Salon has one of the strongest SSS in our retail universe at 8.2% on top of a very difficult 8.8% SSS comparison from last year. Shoppers will also gravitate to Costco for everything from groceries, gifts, and home goods, and the retailer is expected to post a 5.6% SSS. Meanwhile, Home Depot continues to benefit from the health of the housing market, and the rise of the DIY experience. As a result, it is expected to register a 5.0% SSS. Similarly, Restoration Hardware is also expected to report a healthy 4.7% SSS, while athleisure will remain strong in the holiday season and benefit Lululemon with a robust 10.6% comp estimate.

Exhibit 3: Top SSS estimates – Q4 2018

Source: I/B/E/S data from Refinitiv

The retailers with the weakest SSS estimates are suffering from company-specific issues. Vera Bradley has posted over three years of negative SSS, and has the weakest SSS estimate for the holiday season at -16.5%. Likewise, retailers with a big presence in malls are hurting from weak traffic — Chico’s and Francesca’s have been out of favor for some years now and have a -1.3%, and -1.8% SSS estimates, respectively.

Exhibit 4: Bottom SSS estimates – Q4 2018

Source: I/B/E/S data from Refinitiv

Q4 holiday guidance – tariff worries

There’s been some concern about tariffs and a possible trade war. Retailers started reporting Q3 2018 earnings and in October, 25 of them have mentioned tariffs during the earnings call.

Kevin G. Wills, CFO of Tapestry, said during their earnings call that the “10% tariff went into effect in the latter part of September, increasing to 25% on January 1. We have included that in our guidance and it is having a little bit of headwind for us” (Source: Tapestry, Inc. earnings call, 10/28/2018).

There’s also a lot of uncertainty around potential price increases towards the end of the year as tariffs on imports and products kick in. Ultimately, this will have a strong impact on how retailers prepare for the biggest shopping months of the year. As a result, a number of them lowered guidance for the holiday season. For Q4 2018, retailers seem a bit more bearish compared to last year. To date, there are nine negative EPS preannouncements issued by retailers and only one positive (Exhibit 5).

Exhibit 5: Holiday Earnings and Revenue Guidance Q4 2018

Source: I/B/E/S data from Refinitiv

Doing it differently

This holiday season there will be a focus on experiential retail as Refinitiv discovered in a collaboration with The Lionesque Group – a retail strategy company that specializes in roll-out strategy, store design  and in-store experiences. The Lionesque Group expects to see more in-store events including:

  • Walmart holiday parties and driverless rides to store locations
  • More opportunities for shoppers to be educated on new products and try things out, including:
  • The Container Store’s Where Space Comes From
  • Williams Sonoma cooking demos
  • Amazon’s Shop in Shop demo labs
  • Best Buy’s VR demos
  • Other creative experiences that shoppers can only enjoy by visiting a store location (like Nordstrom Pop In program).

Collaboration is king

Kohl’s continues its collaboration with Amazon as it expands the number of return stations. Similarly, more and more retailers are partnering in order to stay relevant and afloat. A few standouts this holiday include:

Build-A-Bear and Walmart

 Build-A-Bear is launching test stores (shop-in-shops) inside targeted Walmart locations in California, Texas, Florida and Arizona and is expanding its licensing program with an exclusive plush launch at Walmart and Walmart.com. After two years of sluggish Same Store Sales, Build-A-Bear could benefit from Walmart’s store traffic. Walmart has seen continuous comps acceleration, and store traffic which could be beneficial for both retailers this holiday season. Currently, the discount giant is expected to report a 2.8% SSS for Q4 2018. Analysts polled by Refinitiv are bullish on this alliance, as the retailer is expected to see an improvement in comps with a 2.5% SSS estimate for Q4 2018.

Exhibit 6: Walmart and Build-A-Bear Same Store Sales:  2016 -2018

Source: I/B/E/S data from Refinitiv

Whole Foods and Amazon

Amazon will be leveraging its Whole Foods physical footprint as a channel to distribute the Amazon book of toys catalog this year. The online giant is expected to see an 18.74% jump in revenue this holiday season (Exhibit 7).

Exhibit 7: Amazon Revenue Outlook Q4 2018

Source: I/B/E/S data from Refinitiv

 Walgreens and Glamsquad

An 11-store pilot will launch in December in six U.S. cities of 400- to 1,000-square-foot Birchbox shops within select stores in Chicago, Dallas, Los Angeles, Miami, Minneapolis and New York. Walgreens has also taken a minority stake in Birchbox and is expected to see a 5.1% increase in earnings in Q4 2018.

Exhibit 8: Walgreens Revenue Outlook Q4 2018

Source: Eikon by Refinitiv

Pick-up lockers

Micro visits are expected to help boost in-store sales as customers are motivated to make an additional purchase while picking up their online order.

  • In the first quarter of 2018, Home Depot reported that 46% of their online orders were picked up in their stores.
  • Whole Foods stores that provide electronic lockers saw pick up visits were up 11% compared to 7% in stores that did not have lockers.
  • Kohl’s has experienced a boost in foot traffic thanks to electronic parcel lockers and has reporting seeing a 12% increase in foot traffic after installing return centers.
  • Dick’s Sporting Goods reported their pilot install of BOPIS brand electronic lockers improved customer experience.

Tech spend priorities

As retailers get ready for the holiday season, they are investing significantly in technology. Retailers will push to be creative and innovative on how they’re reaching consumers and where they’re reaching consumers with surveys, limited time deals and live shopping opportunities.

Exhibit 9: Tech Spend Priorities

Source: The Lionesque Group

Personalization

People expect brands to return personalized results that are more specific and tailored to them. Holiday shoppers are looking for retailers to remember personal details such as past sizes and items they’ve purchased. When searching for gifts for others, shoppers want results that are more specific and personalized to their immediate needs.

Chatbots

There will be a continuous evolution of artificial intelligence use across the shopping journey, especially via chatbots to not only support shoppers with ordering questions, but to also provide a more on-brand personalized, guided shopping experience.

Toys

With retailers vying to pick up Toys R Us market share, the toys segment continues to be a category to really watch this holiday season. Toys R Us recently announced it is relaunching as ‘Geoffrey’s Toy Box’ with popups in grocery stores. Meanwhile, other retailers aren’t just allocating shelf space to the category, they are investing in social campaigns with influencers, investing in more creative “meet Santa” moments and planning robust in-store calendars of events.

Key retailers to watch:

Walmart

  • Expanded store space for holiday by expanding permanent toy space in 235 stores.
  • Launched America’s Best Toy Shop right after Halloween with a catalog with 40 top-rated toys by kids and including 16 kid-influencers in the campaign.
  • Expanded toy space in certain stores and allocated more action alley space to toys.
  • Will be doing a lot of events for toys this holiday.
  • Some stores given sales plan to double their toy business this holiday where it makes sense (ie: stores within a mile radius of a Toys R Us).

Target

  • Stated week of October 15 that it will add nearly 245,000 square feet of new space for toys across more than 500 stores before Nov. 2. The company also plans to stock more than 2,500 new and exclusive toys, twice as much as last year.
  • Like WMT, will be hosting in-store events for kids to drive traffic by hosting 25,000 “hours of joy” events across stores later this year, allowing kids to test out the latest toys and meet fictional characters
  • Planning a fuller remodel to 100 stores, which will allow those locations to showcase larger items, including, electric ride-on vehicles, playhouses and outdoor play sets.

Party City

  • Opened 50 “Toy City” stores this holiday season, set to sit alongside its Halloween pop-up shops.

Amazon

  • Continues to leverage brick-and-mortar via its ownership of Whole Foods as they plan to distribute toy catalogs at Whole Foods grocery stores later this year.

Health and wellness

We expect retailers and mall groups like Brookfield Properties to invest in the health and wellness trend by not only expanding their assortment in the category, but also strategically partnering with popular health and wellness experience brands like SoulCycle and Peloton on holiday-specific campaigns that incentivize cross-shopping.

 

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