October was a good month for retailers across the United States, and the surge in business could not have come at a better time. The Commerce Department reported a retail sales jump of +1.2% over September of this year and a jump of 7.3% over 2009, indicating steady recovery of consumer confidence despite the persistent high rate of unemployment.
Much of the increased spending came from car sales and food service though, and while the Commerce Department noted particular increases in clothing sales, it also reported declines in appliance and department store sales. An increase in spending improves retailer confidence, but these types of declines are precisely what retailers don’t want to hear one week before Black Friday. Fall 2010 may end up being just as brutal as fall 2009 for big box retailers, department stores, and other mainstream outlets hoping for a green Christmas.
A new report from Bloomberg paints an especially troubling picture for big box outlets like Wal-Mart (NYSE: WMT), Target (NYSE: TGT), and Best Buy (NYSE: BBY). All of these stores rely on middle class spending to break even following the holiday season, and while the recession isn’t expected to produce as steep a dip in retail spending as was seen last year, analysts are still predicting flat numbers.
Worthington, Ohio research firm BIGresearch conducted a survey of households with incomes below $50,000, and they reported an average holiday budget of $490.33, a dip of -1.2% according to BIGresearch’s 2009 results. Households with income above $50,000, however, are expected to spend an average of $942.12 over the season, a +2.9% increase. High income customers spending will benefit some—computer and smartphone manufacturers like Motorola (NYSE: MOT), Apple Inc. (NASDAQ: AAPL) and others will benefit from spending by those in a higher economic bracket—but mainstream retailers aren’t likely to reap those dividends.
With consumer spending expected to be relatively flat, retailers are introducing a number of aggressive promotions that may end up hurting revenue more than low sales. Best Buy is making mobile phones the centerpiece of their Black Friday sales, with both phones and plans through Best Buy supported carriers seeing drastic price cuts. Sprint Nextel (NYSE: S) phones like the Samsung Transform and LG Optimus S as well as AT&T (NYSE: T) supported BlackBerry phones from Research in Motion (NASDAQ: RIMM) will be sold well below cost, but Best Buy’s undercutting may end up damaging the company’s margins.
Oppheimer raised their target price for Best Buy to $53 per share, up from $45, but Stifel Nicolaus believes that the company has too much stock to avoid offering electronics at “substantial discounts.” Current shareholders certainly shouldn’t sell Best Buy right now, but prospective buyers looking to capitalize on the holiday surge should hold off for now.
Target is also rumored to be preparing for massive price cuts the weekend following Thanksgiving. Brad Olson of Gottadeal.com claims that the retailer will be offering major deals on HDTVs and 50% of all clothing and toys. Wal-Mart has already felt pressure to lower toy prices thanks to Target’s aggressive pricing. The retailer will report its third quarter earnings this Wednesday, and Thomson Reuters is expecting revenue to be flat for the quarter and for Target to report increased sales in essential items. Shareholders may see a dip in stock price before Black Friday even hits, and unless Target can find a way to increase prices in early 2011, share price my dip back below $50 per share before the end of the fiscal year.
No company better embodies these stores’ struggle with online retailers better than Wal-Mart. The company’s holiday strategy making headlines this month isn’t a Black Friday sale, but the decision to offer free shipping on all online orders. The move is an attempt by the original big box chain to beat Amazon.com Inc. (NASDAQ: AMZN) at their own game this holiday, offering better deals on both entertainment media and electronics while matching Amazon’s shipping costs. Research group ATG found that 84% of consumers plan to shop online this year, while another group, Accenture, found in a recent study that 43% of consumers shop online because of free shipping offers.
Wal-Mart, Target and others will still struggle to match Amazon.com’s earnings following the holiday no matter the shipping promotion, though. Even though Amazon is hiring 15,000 seasonal employees to compensate for increased order volume throughout the holiday, they don’t maintain a work force that is even a fraction of the size of physical retail chains. Both Target and Wal-Mart have already announced their own seasonal hiring pushes, with Wal-Mart expected to match or exceed last year’s hiring of 14,000.
If any retailer is going to thrive this holiday, it’ll be those on the Internet, not down the block.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.