Holiday Shopping Season Outlook: Will Inflation Spoil The Party?

Will consumers be spending less money on gifts this year due to higher costs for goods like groceries? MoneyTalk’s Greg Bonnell discusses the outlook for retail with Chris Graja, Senior Analyst, Retail at Argus Research.

Transcript

Greg Bonnell – What are the catalysts right now that might separate some success stories from some perhaps not so successful stories this holiday season?

Chris Graja – Yeah, that’s a great question. And to put catalysts in context, I mean, the reason they’re so important is everybody on Wall Street, we all build our models. We price in earnings. We price in a long-term growth rate. We assess the risk. We assess the management. And then you need a change in order to push the shares to be worth above or below what’s in your model.

And I would put the catalysts right now probably into three categories to remember them easily — innovation, relevance, and strength. And the reason innovation is so important is — you spoke about it in the introduction — companies need pricing power to overcome all of the inflation that’s out there. And what we see right now is the companies that have innovative products or have invested in doing unique things have the greatest pricing power and the greatest ability to preserve margins.

So as the earnings reports come out for the fourth quarter, the question is going to be, who was able to continue to drive sales? The questions will be about elasticity. So when you raise prices, how much did your sales trail off? And then how much margin did companies need to sacrifice? And an above expected result on any of those things could be positive for the stock.

In terms of relevance, one of the reasons that I look at relevance is that relevance translates into store traffic. And mathematically in retail world, same store sales, which are a main driver of how people look at the retail stocks, is a combination of traffic and ticket. And over the long term, ticket is kind of a combination of a bunch of things, but some of it’s pricing, and it’s going to be hard to do on a long term.

So companies need to draw people into their stores, whether it’s with a treasure hunt atmosphere, whether it’s education, whether it’s new product drops, as companies like to say, whether it’s convenience. So all of those things, particularly in this environment where people are going to be increasingly challenged in how much they can pay, is how do you draw people in the stores? If you get them in the store and get them excited, given that people only have so many dollars to spend, how do you get more and more of those scarce dollars, maybe, than they intended to spend with excellent merchandising?

And then the third one to talk about right now is financial strength. And this can be both a positive catalyst and an anti-catalyst, in a tough market environment, showing that you have the ability to raise dividends, or to be a little bit stronger in terms of repurchasing stock. Those things are all very important on the positive side.

With interest rates higher, and all of us looking at companies’ balance sheets, a company that has debt to roll over and the possibility of doing it at several basis points higher than they did previously. The possibility that somebody, when rates were low, may have been a little bit more aggressive and took on floating rate debt. Well, now that floating rate that’s going to be a lot more expensive.

And the ability to make an acquisition, a number of companies have been beaten down. There have been challenges to some of the business models. So the companies that have a war chest, if you will, the ability to make a smart acquisition, that could also be a catalyst going forward.

And then maybe one tactical one. As we look to the end of the year, one of the questions is going to be, whose inventories are clean? The big change during this year was that we went from at the beginning of the year, everybody was scrambling, scrambling with supply chain issues, trying to get their inventory stocked up. Then consumer demand kind of turned on a dime and the game became, how do we clear through all of these inventories?

So I think investors want to see companies go into 2023 with clean inventory. So that means a couple of things. One is there isn’t looming markdown risk on the balance sheets. And number two is that companies, if they have the old merchandise out, they’ll have the ability to flow in new merchandise. And that’s become particularly important for the day after Christmas.

Shoppers’ gift cards are an increasingly popular gift item. So when people go into the stores with their gift cards, the best retailers want to have fresh new merchandise out so that people are buying new things, ideally at full price, rather than just combing through the discount rack.

So those are some of the near-term catalysts and ways to think about them right now and going into next year.

Greg Bonnell – So with those as our signposts, you have a company that’s perhaps innovating, you have one that is still relevant to the customer, as you said, because we’re watching our dollars pretty carefully. You got to make sure I will spend them here. They’ve got that financial strength. What does the overall atmosphere for holiday shopping look like? It sounds like there’s some names, obviously, that can be better positioned than others. But in the end, the shopper has to show up. How we feeling about the season so far?

Chris Graja – You know, right now, my forecast for holiday shopping is for a 5% increase over last year. The National Retail Federation, which is a big US trade group, is in the 6% to 8% range. So look, I’ll give you the pros and cons. So on the pros, employment is still relatively strong. Household balance sheets have come out of the pandemic on an aggregate level, certainly, in a pretty strong position.

And one of the things we’ve seen, covering the sector for a long time, is that people genuinely want to make the holiday special for their family and their friends and the people they care about. And that’s probably even more true coming out of the pandemic, that people want to get back to normal and feel that things are normal and kind of happy holidays like the ones we used to know.

On the con side, the challenges are first, that inflation is causing people to spend more and more of their money on food and staples and basics. So that’s left less money available for discretionary purchases. And those things have more margin for the retailers. So you kind of have to go through the forecast line by line and category by category. So for me, I’ve got grocery stores up 7% for the holidays. And it’s normally a very slow growing category, 2%, 3%. But because of all the inflation and the necessity of buying groceries, and probably the additional advantage of dining at home being cheaper than that eating out at restaurants, I think we’re going to see stronger growth than we normally see at grocery stores.

I’m about 4% in general merchandise. Some of that’s inflation. Some of that’s staples. But I mean, that’s a bit of a question. But I think 4% is a reasonable number.

And then e-commerce is probably the most difficult to forecast. My forecast there is for a 5% increase. It’s been growing faster than that, but we’re lapping really strong numbers in the past few years.

And the other thing I think we’re likely to see is that people are going back to stores. After many years of people sitting on their couch and buying online, we seemed to see, even Black Friday weekend, the return of some door busters and the fact that people just wanted to get back to the experience of being in stores and buying things that way.

So I’m at 5%, and we’ll take a look at that as the season evolves.

Original Post