November 20, 2018

U.S. Retailers Offering More Promotions this Black Friday

by Jharonne Martis.

Black Friday – the day after the U.S. Thanksgiving holiday (which is Thursday, Nov. 22 this year) — is one of the most critical retail sales days during the holiday season. For some, such as JC Penney, 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:

  • Retailers having been citing strong consumer confidence all year long, and are aware that more shoppers feel better about holiday spending this year.
  • As a result, there has been drastic changes in promotional email tactics compared to a year-ago, Refinitiv discovered in a collaboration with StyleSage, Co.
  • Retailers are sending out more promotional Black Friday emails vs. last year.
  • The overall average promotional discount hasn’t really changed since August.
  • Currently, the average discount is 40.8% which is slightly above the 40% mark we’ve seen since August
  • The discount stores have been reducing the level of promotions and discounts drastically over the past two years. As a result, they are enjoying better margins.
  • On the flip side, more merchandise will be on sale this year at department stores. About 63% of the merchandise at department stores will be on sale – this means that over half of inventories will be heavily promoted which can come at the expense of margins.
  • The most common promotional online keywords include: shoes, dresses and home.
  • The Refinitiv Same Store Sales Index is looking at a 3.1% growth estimate for the holiday season including Black Friday and Christmas.
  • For Q4 2018, there have been 25 retail negative EPS preannouncements, compared to 10 positive.

Online deals vs. last year

About 63% of the merchandise at department stores such as Macy’s and Lord & Taylor will also be on sale this year compared to 60% last year, which could further continue to hurt profits.

Retailers are doing a number of things differently this year going into Black Friday, as Refinitiv discovered in a collaboration with StyleSage Co., which analyzes retailers, brands, online trends and products across the globe. For starters, they have increased the amount of promotional emails or activity going into Black Friday this year. They are blasting shoppers with incremental emails as they did going into Black Friday last year.

Moreover, the average promotional discount has remained somewhat steady over the last three months. Currently, the average discount is 40.8% and it’s been hovering near the 40% mark at this level since August.  Still, the average promotional discount is higher for the Black Friday week – 38.9% (LY) vs 40.8% this year.  This suggests there is more promotional activity this year.

Change in Promotional Messaging

Retailers have been citing strong consumer confidence all year long, and are aware that more shoppers are willing and able to pay higher prices this year. Last year, retailers ramped up their email promotions significantly in the four weeks leading to Black Friday by increasing the number of emails sent out by 42%, and increasing by 12% the number of active promotions.

Today, it is a different story. In terms of volume, the average number of emails being sent has been pretty steady over the past few weeks, an average of 6.85 per retailer/week. Although, emails have been more consistent throughout 2018, retailers are sending more emails out vs. a year-ago. Last year for the same week we saw 5.83 emails being sent out, and last week it was 7.09, thus showing an increase in the number of emails sent YOY.

Moreover, the categories of promotions are similar to previous years — some of the most common promotional keywords include shoes, dresses, and home.

Digging deeper into the item-level discounts, it is evident that with the exception of the 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

Discounters have done a better job trying to improve margins. Notice how the discount penetration dropped from last year’s 6.0% to 1.0% this year (Exhibit 1). 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 2.0% to 0% this year, indicating that discounters are proactively trying to improve margins.

Exhibit 1: Value Sector Discount Penetration and Average Discount 2016 – 2018

Source: StyleSage Co.

Mid sector

This sector has experienced a slight increase in discount penetration – 60.0% in 2016 to 63.0% this year. This indicates that more than 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. What’s worse, the average discount hasn’t dropped, but rose slightly – 26.0% this year from 24.2% last year.

Exhibit 2: Mid Sector Discount Penetration and Average Discount 2016 – 2018


Source: StyleSage Co.

Premium sector

As expected, there aren’t any meaningful changes in this sector. Both metrics remain pretty much unchanged, and saw the lowest levels of discounting. The discount penetration level is up slightly from 24.3% to 25.0% this year. The same can be said for the average discount level, which saw a smaller increase than the previous year and has moved from 10.2% to 11% this year.

Exhibit 3: Premium Sector Discount Penetration and Average Discount 2016 – 2018


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 popular holiday items have the lowest discount levels going into the holiday weekend. Currently, the likelihood of discount is lowest in shirts and sweaters in the value sector. Meanwhile, the lower discount levels for the mid sector are expected to be in intimates and swimwear. For the premium sector, intimates (again), suits, sweaters and outerwear have the lowest discount levels. 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.

Refinitiv – Holiday Sales Forecast

Overall holiday sales are expected to be stronger than a year ago. The Refinitiv Same Store Sales Index is looking at a 3.1% growth estimate for Q4 2018. This is in line with last year’s 3.2% SSS result, and is slightly above the 3% healthy mark, suggesting spending will be modest. The department stores are facing easy comparisons from a year-ago, and therefore will be posting their first positive growth in years.

Exhibit 4: Same Store Sales Sectors – Q4 2018 vs. Q4 2017

 

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

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. Ross and TJX are both expected to post a 2.0%, and 1.8% SSS growth for the holiday season (Exhibit 5).

Exhibit 5: Q4 2018 Same Store Sales – Department Stores vs. Off-Price Retailers

Source: Refinitiv I/B/E/S

Negative surprises

Of all retailers, department stores might be relying the most on having a great Black Friday to match and or exceed their quarterly estimates.

Yet despite the need to beat earnings estimates, it is evident from the StarMine Model Scores that these retailers are nowhere close to doing so. JC Penney, for example, shows a sea of red when looking at the StarMine Model Scores (Exhibit 6). The department store has a very low score in our StarMine Combined Credit Risk model, the most comprehensive StarMine credit model. This suggests it’s not financially stable, and the likelihood of default is high. JCP’s score corresponds to an implied credit rating of B-.

Exhibit 6: JC Penney StarMine Model Scores

Source: Refinitiv Eikon

Q4 holiday guidance

Retailers are reporting Q3 earnings, and are optimistic about the holiday shopping season. As a result, a number of them raised guidance for the holiday season. For Q4 2018, retailers seem a bit more bullish compared to the previous two years. To date, there are 25 negative EPS preannouncements issued by retailers and 10 positive vs. six this time last year (Exhibit 7).

Still, the bulk of the negative guidance (12%) comes from the apparel sector. That’s in line with the StyleSage data suggesting apparel continues to be more likely to take a discount and have a higher discount than bags and shoes, something also seen in previous seasons.

Exhibit 7: Holiday Earnings and Revenue Guidance Q4 2018 vs. 2017 and 2016

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

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