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The Splurge Factor: The Case for Strong Holiday Sales

This holiday season shoppers are focused on holiday gifts that will wow their loved ones, but they also have another thing on their mind: splurging a bit on themselves.

Dougal Waters | Getty Images

“In 2009 it was all about personal, practical gifts, and last year consumers wanted to treat their loved ones to something special — this year, it’s a little bit of both,” said Pam Goodfellow, director of Consumer Insights at BigResearch.

Shoppers are still looking for value and watching their spending closely, but they also will be doing something they may have skipped last year: they will be fulfilling their own holiday wishes by picking up an item or two for themselves, according to Goodfellow.

And those little treats could help boost overall spending this holiday season, despite the headwinds of an uncertain economy and high unemployment.

“Americans are going to spend a bit more because I think they are a little tired of the economy, unemployment and how tough things are,” said Arkadi Kuhlmann, ING Direct USA chairman and president. “So I think they’re going to spoil themselves a bit more.”

Most retail industry analysts are expecting retailers to see modest sales gainsthis holiday season. Although there are a few like Kuhlmann who have more bullish forecasts of 5 percent to 6 percent sales growth, the bulk of the holiday retail sales estimates are calling for gains of between 2 percent and 3 percent, and retailers themselves are using words such as “cautiously optimistic” to describe their outlook.

There’s good reason to be guarded. Consumers are sending mixed signals, and other factors such as gasoline prices could turn into a serious headwind.

Gasoline Prices Set to Rise

Richard Hastings, a consumer strategist at Global Hunter Securities, predicts retail sales in the November to January time period will rise 5.75 percent this year.

Hastings has been optimistic because consumers have been spending in recent months, but he recently trimmed its holiday forecast by 50 basis points to account for two factors: store traffic has slowed and crude oil prices have been on the rise and could cut into consumer spending.

Although average gasoline prices have fallen in recent weeks, they are higher than they were at this time last year and could climb even further if oil prices remain high. If this happens, refiners will want to pass along their increased costs to consumers.

Store Traffic Down

The West Coast may offer a glimpse of what’s to come. According to the Energy Information Agency, gasoline prices in the West are averaging about $3.83 a gallon, the highest level ever for this time of year.

And while the number of shoppers hitting the stores has fallen 7.4 percent nationally in recent weeks, according to ShopperTrak, the slowdown is greater on the West Coast, where the number of shoppers is down 11.2 percent from the same time last year.

Hastings said the falloff could be a function of the higher gasoline prices in the region as shoppers look to consolidate trips to save on gas. At the moment, shoppers are still buying when they’re there and are actually spending more per transaction.

However, ShopperTrak Chief Marketing Officer Ed Marcheselli said declining store traffic is part of another trend. Consumers have been doing more of their research, price comparison and browsing online before they come into the store, reducing the number of trips they make.

For the holiday season, ShopperTrak is expecting a 2 percent to 3 percent decline in store traffic nationally, but a 3 to 3.5 percent increase in retail sales, Marcheselli said.

Tapped Out?

Americans have been tapping into their savings to help fuel their spending, but there are questions about how long it can continue.

Wal-Mart CEO Mike Duke told investors on a conference call this month that the retailer’s customers remain concerned about their jobs as they juggle their credit card bills and take steps to conserve cash by clipping coupons and cutting back on vacations and eating out.

But this fits the pattern of the more prudent spending that we’ve seen since the recession. Shoppers are paying more often with cash or debit cards rather than running up credit card bills. They’ve been building up their savings accounts and reducing their household debt.

According to ING’s Kuhlmann, two-thirds of shoppers will be using cash or debit cards to pay for their purchases, while only one in five plan to flash the plastic.

“Main Street America is trying to become financially conservative, but they definitely know this is the year they have to treat themselves a little bit,” he said.

Hunger for Deals

Many consumers remain deal driven, and it is expected that Black Friday, the day after Thanksgiving known for its sales, will be a bigger event that last year. According to BigResearch, about a third of American consumers say they will “definitely” be shopping Black Friday weekend, that’s up from 27 percent last year.

And retailers have been jockeying to nab those bargain hunters, with stores such as Walmart, Toys ‘R Us, and Gap open on Thanksgiving, and Macy’s , Kohl’s and Target planning to open at the stroke of midnight.

And Black Friday won’t be the only time for big sales promotions. Retailers started them even before Thanksgiving, and there will be further events as Christmas draws close. Online, most retailers have set aside bigger budgets than ever to fund free shipping promotions.

“Shoppers are looking for deals before they are looking at brands,” said Brand Keys president Robert Passikoff. And with price comparison applications on smartphones, it has never been easier for consumers to find the best price.

Pent Up Demand

So who wins this holiday season? The hunger for a good deal combined with the desire for quality products is likely to have a barbell effect on consumer spending.

This means large number of consumers will be trudging off to the discounters such as Walmart and Target as well as lower-end stores such as Dollar Tree and Family Dollar .

But luxury retailers such as Nordstrom and department stores such as Macy’s should also do a brisk business.

Craig Johnson, president of Customer Growth Partners, expects apparel will lead holiday sales growth, with a year-over-year increase of 7.6 percent – its strongest showing in more than a decade.

Johnson also expects luxury sales to rise 12 percent this year, with strength in apparel, accessories such as handbags, and jewelry.

Department stores also should be celebrating this year as sales in this category are expected to rise from last year. Hastings expects Macy’s to get a boost from increased numbers of consumers buying cooking and kitchen items, but it will have a fierce competitor in Kohl’s.

The only potential weak spot in the category could be JC Penney , which still in the early stages of an effort to turn around its business.

Online retailers such as Amazon.com as well as traditional retailers with strong online offerings should benefit greatly from the increasing numbers of shoppers who will be buying their gifts online. Analysts are predicting double-digit sales gains for online sales.

And with the strong demand for tablet computers, Apple should also have a happy holiday.

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