Fitch sees holiday sales up 3% to 4%; gross margins flat; promotions intense
NEW YORK - Fitch expects U.S. sales growth to modestly improve in the coming holiday season, with retail sales (excluding auto) expected to grow at 3%-4% in November/December versus 2.8% year to date. Fitch expects online sales will grow in the 12%-14% range during the fourth quarter, in line with year to date levels.
A number of Fitch-rated retailers are expected to show improvement in fourth quarter comparable store sales (comps) relative to weak or negative comps in the fourth quarter of 2013. Sales-weighted average comps for department stores are expected to be positive 1.5% versus negative 0.8% last year, mainly driven by an improvement at Bon-Ton and Sears, which posted negative high single comps last year and are tracking flat to modestly negative currently.
The discount sector remains sluggish, although comps have recently turned positive at Wal-Mart Stores, and Target Corp. following a string of flat to negative comps. Fitch expects 0.5% to 1% positive comp for Walmart in the fourth quarter while Target's comps should be modestly higher at 1%-2% as it laps the data breach that occurred in last year's fourth quarter.
The decline in retail gasoline prices - with a gallon of gas (based on weekly U.S. all grades all formulations data as reported by EIA) down about $0.32 year over year and at the lowest level since November 2010 - will disproportionately benefit low and middle income consumers, and will therefore accrue primarily to the benefit of discounters, dollar stores and supermarkets.
Specialty apparel retailers are expected to produce uneven results this holiday season, with declining mall traffic, limited discretionary dollars for middle income consumers, and a shift in spending toward smart phones and other electronics. Gap has experienced weak sales in its namesake Gap stores, and Fitch expects flat to modestly negative comps and lower gross margins in the fourth quarter.
Extended hours on Thanksgiving and extended black Friday weekend promotions by more retailers are an indication of what is expected to be a highly promotional holiday selling season to drive traffic into stores as consumer remain ever value conscious. This promotional intensity is exacerbated by the rapid growth of online e-commerce (desktop) and mobile sales, which account for approximately 13% of retail sales (excluding motor vehicles and parts, food services, food and beverage stores, health and personal care stores and gasoline stations) but almost 50% of total retail sales growth. Gross margins are expected to be flat or decrease modestly for most retailers as they invest in pricing and in their online capabilities, although inventory levels appear to be appropriate.
Promotions will remain intense, particularly in areas such as apparel and consumer electronics and toys, where traditional pure play retailers such as Best Buy Co. Inc. and Toys "R" Us, Inc. (Toys) try to fend off competition from discounters and online retailers. However, Fitch expects both retailers should report flat comps (relative to negative 1% for Best Buy and negative 4.1% for Toys in 4Q13) and flat to modestly lower gross margin after a 240 bp hit to gross margin for both in 4Q last year.
US retail sales (ex auto) as reported by the Census Bureau have grown by 2.8% year to date through October, at the low end of Fitch's expectation of 3%-4% growth for the year but essentially in line with the 2.9% growth in 2013. This was led by a 7.1% growth in nonstore retailers (approximately 13% of total sales), 6.2% growth in personal and healthcare stores (8% of total) and 4.7% growth in building materials (9% of total). This was offset somewhat by a 2.5% decline in department store (4.3% of sales), and soft clothing and accessories sales at up 1.6% year to date (6.6% of sales).