The sands in the hour glass are slipping away and the holiday shopping season for 2010 is about to wrap up. We saw the images of the throngs of people on Black Friday and three days later Cyber Monday hit an all new high and experts were excited about the consumer coming back. Sources tell me retailers are almost near pre-recession holiday hiring levels which bode well for the companies outlook this holiday shopping season.
But did the consumer deliver? The U.S. recovery is still far from over. The real unemployment rate is hovering around 15%. So which stores did shoppers part with their money and what was the mall traffic to bag ratio like? For all this, I asked, Brian Sozzi, Research Analyst of Wall Street Strategies who specializes in the apparel/hardline goods sectors of the retail industry.
LL: Black Friday started off with a bang this year, have you seen the momentum continue this holidayshopping season?
BS: I have summarized the holiday season to clients as one that, yes, started with a bang but is poised to conclude with a whimper. Let me put this call into proper context. Is this a repeat of holiday 2008 where the panic in the equities markets led to markdown mania at retail? No. Inventory is better situated compared to 2008, thanks to investments made in planning and allocation systems and a modicum of consistency in monthly sales trends. Is this even holiday 2009 where a 50% off sign was the requirement in getting the consumer to spend? No.
Retailers are having success in getting consumers into the store with a 30% off promotion, due in large part to a return in confidence post midterm elections and much less personal balance sheet leverage. All of that said, what we observed with the material comparable store sales beats relative to consensus in November was the application of savings fatigue to the malls and online, prodded along by retailer Black Friday creep. In December, based on my channel checks and discussions with store associates and consumers, traffic was under pressure in
weeks one and two of the month and buying fatigue was apparent.
LL: In years past there was a consumer trend of shoppers waiting until the last minute to grab the steep discounts. Have you seen much slashing of prices this year?
BS: The discounting by specialty apparel retailers and department stores has been interesting to track since Black Friday. On Black Friday, I appeared on CNBC's "Squawk Box" to discuss the start of the season. Before the segment aired, I walked the entire mall to obtain a feel of the inventory mix and the types of promotions being conveyed to consumers. I was pleasantly surprised from an analyst standpoint that deep discounts were not particularly rampant in the malls, and doorbusters at discounters looked about right for a typical Black Friday.
As Black Friday progressed, retailers pulled back on promotions noticeably, obviously keenly aware of the increased receptiveness of the consumer to spend. From the point of Black Friday until week two in December, I observed only a modest step up in promotional activity in terms of breadth and depth. For example, Ann Taylor Loft has been 40% off the entire store for the holiday season.
Retailers were indeed partaking in a game of cat and mouse with consumers, wanting to maximize margin dollars early on as they knew the release of pent up demand was likely unsustainable, therefore requiring markdowns to get a sale. During Super Saturday weekend, the magnitude of promotions intensified in the malls and within certain categories at discounters, such as in 42 inch and below LCD and plasma TVs. A 30% off sign morphed into a 40% off sign. The namesake Ann Taylor division, basically 30% off the entire season, added a new wrinkle of 50% off sweaters that wasnÕt existent in prior weeks. Abercrombie & Fitch (ANF) recently moved to 40% at all its divisions from 30% in previous weeks. I think retailers are concerned about being too bloated on inventory entering January, where I suspect the consumer will return to their thoughtful spending ways.
LL: Who will be the big winners of the holiday season?
BS: Names that fall under this category include Target , Abercrombie & Fitch , Crocs , and build a Bear .
I upgraded my recommendation on Target shares to buy from hold recently, jumping off the fence and into the game so to speak. Price target, $67.00. The shift in rating primarily revolved around favorable assessments made during my countless Target store tours this holiday season and talks with key industry contacts. With Wal-Mart's merchandise assortment continuing to be influx, specifically the basics only softlines department in a trade up consumer environment and lack of awareness that items are being put back in the consumables department post the Project Impact scheme, I think Target is a share gainer. The significant acceleration in comparable store sales in November from October indicated that TargetÕs launch of its 5% RedCard reward program mid-month was a difference maker, getting consumers into the stores more frequently to purchase food, consumables, and the occasional discretionary item. In discussions with contacts, the overarching takeaway has been the abundance of customer traffic, consistently, at Target stores that boast a P Fresh format. Improved consumer sentiment pre-holiday adds lighter fluid to the base of wood that is Target's refurbished food and health and beauty departments in many locations, and the 5% RedCard reward program.
Abercrombie & Fitch had a sexy month to start the holidays, no doubt about it. November was another indication that consumers are responding to the lower average unit retail prices (AUR) at all brands.
Abercrombie's AUR declined by 3% for November, off the pace of double-digit percentage declines earlier in the year. I continue to believe Abercrombie is on track to have the best holiday season from the teen apparel sector, a combination of a rebounding domestic business (stores full a higher quality, key items and a greater sense of fashion) and further acceptance of the namesake brand and Hollister internationally.
Crocs products have been selling out at the small, highly productive Crocs kiosks in the mall, particularly in boots--which are priced at a cool $70.00 for a piece of plastic with some thermal around the calves. I have observed people being told to wait an hour or so for products as they replenish stock mid-day. In a non creepy way, I followed one person around the mall and she promptly returned to the Crocs kiosk in an hour. Tells me demand is there, people want the stuff.
Build a Bear may put up a cute holiday quarter. The stores I visited have been quite nicely trafficked, and I am not seeing many promotions in the stores. Interestingly, I have found that Build a Bear now distributes a make your own bear box at home at discount retail chains, which is an added distribution point.
LL: Who are the Losers?
BS: Pacific Sunwear , Hot Topic , and Bebe stand out as clear losers. On the other hand, I think Coach may have been an under the radar loser in that it may not achieve some of the heightened analyst earnings estimates for its holiday quarter.
Pacific Sunwear started the holiday quarter on a gloomy note (-10% comp). Ultimately, same-store sales for Pacific Sunwear on Black Friday printed at -2% which was a stark underperformance relative to other teen apparel chains in the mall. I recently downgraded my recommendation on the stock to sell from hold, and now harness a $5.00 price target. My rating downgrade comes after numerous tours of Pacific Sunwear stores since Black Friday, where I have observed light customer traffic at peak mall times and a correlated step up in the amount of inventory on the selling floor. Soft traffic plus elevated inventory creates risk to consensus earnings forecasts for 4Q10 (currently at a LPS of $0.10, but scattered about
are estimates towards the low-end of management's guidance for a LPS of $0.07) and the somewhat bullish outlook conveyed by management for 1H11.
Hot Topic has been one of the more promotional teen apparel retailers this season, owing to off-trend merchandise in key categories. The stock is richly valued at 43.7x my EPS estimate for FY11; that's a P/E multiple approximately triple my teen apparel sector coverage mean. I continue to view other players in the sector as better investment opportunities given cheaper valuations in the context of growing U.S. businesses and international contribution.
Bebe continues to be one of the most promotional specialty apparel retailers in the mall this holiday season. In my store tours, Bebe has been running 50% since Black Friday weekend on a good portion of the assortment. I donÕt think the assortment is showing well (as evidenced by elevated inventory), and do not rule out an earnings warning for the holiday quarter.
I downgraded my recommendation on Coach to hold from buy on December 14 citing (1) valuation; and (2) observations made on the holiday quarter to date. While the company is a clear share gainer in China, I believe risks are not being appreciated for Coach's U.S. business.
In numerous channel checks this season, I have observed less of an exciting assortment on a relative basis (more "C" logo bags), somewhat of compromised quality compared to prior year collections, and mixed traffic trends at peak times for the mall.
LL: Online shopping was strong this year, how much did it take away from brick and mortar stores?
BS: If you are of the mindset that the consumer is not out shopping willy nilly, which I am, then certainly online pulled sales from the malls, outlets, and discount locations. For most in retail, online constitutes 8% to 10% of total sales and it's a high margin opportunity even with the free shipping mania of this holiday season. So retailers do not mind the increasing importance of online sales. Consumers have become more comfortable with paying online, and retailers have done a good job enriching the user experience by adding product reviews, blogs, or simply by offering a greater breadth of choices.
LL: What was the traffic like compared to the bags being carried?
BS: It's important to break down the question into a tale of two months. In November, mall traffic was quite solid, and the bag counts were certainly improved from 2008 and 2009. It felt like a return of normality to the holiday season to be honest, though still somewhat guarded. Consumers were not just congregating at the mall food courts or the DVD section at Best Buy, they had savings in hand or pre-loaded on a plastic card and were prepared to buy. And buy they did. Unfortunately, I think December has been a different set of circumstances, and a month that depicts the new realities in retailing; measured spending done within brick and mortar stores and online.
In my mall tours, the overarching question I have kept coming back to in December, where are all the bags? For those that came out in force in November, December may have been used to pick up promotionally driven last minute items, such as a $5 t-shirt from Old Navy or a used videogame from GameStop . Those that have waited to the last minute, I see a focus in them that they have an idea of the gifts they want to buy and when that list is satisfied, the wallet is closed. LL: What items moved? Was it promotions that attracted shoppers? Any must haves?
LL: What items moved? Was it promotions that attracted shoppers? Any must haves?
BS: Embellished tops (sequins on blouses, chunky sweaters), footwear (innovative styles from Nike on down to Timberland), evolved jeggings, jewelry, and luxury handbags moved briskly. Pants, either denim or khakis slim fit, did not move so well and have been on aggressive markdown in recent weeks.
Coats also seemed to lay idle on the sales floor (specifically Columbia brand), interesting in light of the weather conditions. Must have products include the Pillow Pet (began in limited doors in October, and are now everywhere), Pictionary Man game, THQ's uDraw game tablet for the Nintendo Wii, iPads, iPad accessories, and the next installment in the Call of Duty franchise. Microsoft's (MSFT) launch of the motion sensing Kinect was also met with strong customer reception. As for what attracted customers, it's clear cut believe it or not. Differentiated product that offers value, and value is not solely an aspect of price. Those items that did not sell well can almost be quantified as commodity based and not as value enhancing to one's life.
LL: Anything surprise you this holiday season?
BS: Retailers waiting so long to mark down product was a surprise. The missing quality element to many items in the apparel and accessories sector is interesting. This disappearing quality aspect that has been playing out seemed to gain greater steam this season, perhaps as a means to train consumers as to what to expect in a world of rising soft asset prices such as cotton and leather.A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."