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Why Holiday Should Turn Out A-OK for Retail: Week Ahead

Despite price increases, inflationary concerns and lackluster Thanksgiving weekend foot traffic, retailers are likely to have a decent holiday 2021 even with the omicron Covid-19 variant rattling markets worldwide.

“Now that we’re in December, the holiday shopping season is nearing the finish line,” Jack Kleinhenz, National Retail Federation chief economist, said in the December issue of NRF’s Monthly Economic Review. “The question is how have factors ranging from economic indicators to the twists of the COVID-19 pandemic affected the season so far, and what role will they play in the weeks that remain? There’s no crystal ball to provide a definitive answer, but the latest data is encouraging and provides useful insights. In fact, the season could turn out even better than we expected.”

The retail trade group forecasts holiday sales growth as high as 10.5 percent over last year. Kleinhenz noted that the holiday season seemed to be off to a good start, adding that with shopping starting earlier, the Thanksgiving weekend now “helps to mark off the holiday season rather than serving as the kickoff it once was.”

Even though The Conference Board’s Consumer Confidence Index fell last month to 109.5 from 111.6 in October, and November’s job growth also disappointed—nonfarm payrolls rose by 210,000, well below Wall Street’s estimates of 573,000 following a 546,000 gain in October—Kleinhenz said spending data offers a more relevant measure of consumer behavior.

With spending starting earlier in the season, and foot traffic up from year-ago levels, a good portion of holiday spending was shifted forward from December. And purchases earlier in the season, even when consumers rely on planned promotions, tend to provide retailers with higher margin gains versus later-season, marked-down purchases with slimmer margins.

While it isn’t immediately clear how much consumers actually spent at different stores on Black Friday, foot traffic improved over last year, even if it didn’t match 2019 levels. And store traffic might suggest which retailers had a better shot at winning market share on Black Friday.

According to consumer foot traffic data firm Placer.ai, Target saw a 31.7 percent gain on Black Friday from year-ago figures, although traffic was down 3.1 percent from 2019. Walmart saw traffic increase 29.1 percent from last year, and up 2.8 percent from 2019.

Among the department stores, the big winner was Nordstrom’s full price stores, up 107.5 percent from last year, although down 18.6 percent from 2019. That was better than Neiman Marcus, which saw traffic jump 96.2 percent from last year, but down 20.3 percent from 2019. Macy’s traffic rose 68.4 percent from 2020, but down 18 percent on a two-year basis. And Kohl’s saw traffic rise 25.5 percent from a year ago, but down 23.1 percent from 2019.

Among the off-price retailers, Nordstrom Rack was the big loser. While traffic was up 62.4 percent from a year ago, it was down 27 percent from 2019. Nordstrom had previously said Rack suffered from inventory shortages in women’s apparel and shoes. In comparison, the big winner was Burlington’s 42.0 percent uptick in foot traffic. Even better, the decline from 2019 was just 0.4 percent. At Ross, foot traffic rose 36.6 percent from 2020, and 3.6 percent over 2019. Also doing well was T.J. Maxx, which saw traffic rise 33.6 percent from 2020, and 2.9 percent from 2019. Marshalls saw traffic rise 33.2 percent from last year, but decline 1.5 percent from 2019.  HomeGoods saw foot traffic rise 15.5 percent from last year’s levels, and even better, the metric was up 7.6 percent from 2019.

Another way retailers can improve margins is by raising prices. That has been an important focus for investors, particularly given rising freight expenses this year.

Companies including Capri Holdings and Tapestry have been able to raise prices in recent months. They have pulled back on promotions, elevated products and narrowed assortments. In addition, off-price retailers such as  TJX  and Ross have gotten away with charging more for certain products.

“Companies that focus on elevating their pricing power are the ones that have offsets. Everyone has supply chain constraints. The question is who can offset the pressure? The easiest way to offset the pressure is with higher prices,” Simeon Siegel, retail and services analyst at BMO Capital Markets Corp., said. He believes the companies best positioned to raise prices are those that successfully navigate fourth-quarter supply chain headwinds and have a better shot of ending the season with gross margins relatively intact.

Pricing could be an even more important topic in the months ahead. Inflation appears to be rising globally. In the U.S., the annual inflation rate surged to 6.2 percent in October. That’s above the 5.8 percent economists forecasted and the highest since November 1990. Equity strategists at Bank of America Securities expect the Federal Reserve to intervene in June 2022. However, Federal Reserve chairman Jerome Powell earlier this week said the central bank could begin tightening monetary policy sooner rather than later. On Friday, the International Monetary Fund said in a blog post that the Federal Reserve should accelerate the process to curb rising inflation risks.

What impact policy rate increases might have on retail sales is yet to be determined, but at least it likely won’t have an immediate effect on holiday sales.

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