Q&A On Holiday Shopping

As America prepares to spend its meager savings (which today were reported to have increased modestly from 4 year lows of 3.3% to 3.5%) and dip even more in debt on yet another epic shopping exodus which begins in just over 24 hours and continues through the end of the year, whereby people are somehow once again fooled into believing they "save money" by "spending money", those with a more pragmatic eye may wonder if this will be the weakest holiday shopping season in a decade, if the economy indeed mimics the stock market (the opposite, not so much), and whether it is now time to finally short consumer discretionary stocks with impunity. Goldman's Zach Pandl answers this question and more with his "Q&A on Holiday Shopping." To wit: "The US consumer looks mixed heading into the holiday season. On the one hand, growth in consumer activity slowed significantly this year. On the other hand, the most recent spending numbers have shown an incremental improvement.  In addition, job growth has been holding up, which should underpin spending. Retail industry groups expect year-over-year growth in holiday sales of 2-3%, down from a 4-5% increase last year. The GS/ICSC 2011 Holiday Spending Intentions Survey also seems consistent with slightly slower growth than last year." Naturally, this being Goldman, if there is a way to take the other side of the bet (or do what GS is doing and not its clients) that is probably not such a bad idea.

From Goldman: Q&A on Holiday Shopping

The 2011 holiday shopping season kicks off in earnest this week with “Black Friday”, the day after Thanksgiving and traditionally the busiest day in the year for US retailers. Retail sales are important year-round, but the holiday shopping season provides a unique look at discretionary consumer spending at peak buying time. Here we discuss the outlook for this year’s holiday shopping season in Q&A format.

When is the Holiday Shopping Season?

The US holiday shopping season is usually defined as retail sales in November and December. Because of gift buying and seasonal events, these months account for an outsized share of consumer spending (about one fifth of the annual total), and are the cause of much of the seasonality in GDP and employment.

According to surveys, about 40% of consumers begin their holiday shopping before November , and the increasing use of gift cards means that a larger share of purchases take place in January or later (retailers report gift card sales when they are redeemed, rather than when the gift card is originally sold). But the weeks between Thanksgiving and the end of the year still account for the bulk of holiday sales.

Within this period, a few key dates usually see the heaviest shopper traffic. Normally Black Friday is the busiest shopping day, according to retail research firm ShopperTrak. After Black Friday, the next four busiest days are likely to be Saturday December 17 (“Super Saturday”), Friday December 23, Monday December 26, and Thursday December 22. Typically one third of all seasonal sales are made one week before Christmas. Analysts often watch the Monday after Thanksgiving (“Cyber Monday”) for an indication of online holiday sales.

How Are US Consumers Looking?

The US consumer looks mixed heading into this year’s holiday season. On the one hand, growth in consumer-related activity slowed significantly over the last few quarters. For example, our Consumer CAI—a coincident index of consumer activity constructed with various monthly indicators—slowed from 3.2% last December to 1.6% in October (Exhibit 1). Much of the slowdown reflects the deterioration in consumer confidence and weaker disposable personal income growth, which may weigh on household spending during the holidays.

On the other hand, the most recent spending numbers have shown an incremental improvement. “Core” retail sales (sales ex-autos, gasoline and building materials) increased by 0.5% month-over-month in September and 0.6% in October. Real disposable income also increased in October, the first gain in four months. In addition, job growth has been holding up reasonably well—jobless claims are coming down and nonfarm payroll employment has increased by an average of 114,000 over the last three months. Steady payroll growth should underpin consumer spending during the holiday season and in 2012.

What Is Expected This Year?

Several retail industry groups produce forecasts for holiday spending. The definition of holiday sales differs slightly depending on the source, but in general expectations are for year-over-year (yoy) nominal growth of 2-3%, down from a 4-5% yoy increase last year (Exhibit 2). This compares to average growth over the last ten years of approximately 2.5%.

Our GS/ICSC 2011 Holiday Spending Intentions Survey also seems consistent with slightly slower growth than last year. In this year’s survey, 62% of respondents said they planned to spend the same amount or more on holiday gifts, the same percentage as in 2010. However, a greater percentage said that they planned to be more restrained on purchases of personal items, and this shift was largest for middle-income households. The survey also showed more planned spending on Black Friday, which can be interpreted as evidence of price-conscious shopping given heavier discounting on that day.

How Should We Track Holiday Shopping?

The most widely used measures of holiday shopping are derived from the Commerce Department’s monthly retail sales report. Holiday spending has the greatest impact on a few categories, the largest of which is referred to as “GAFO” (General Merchandise, Apparel and Accessories, Furniture and Other Sales), and reflects products typically found at department stores. Other retail categories often included in measures of holiday sales are health and personal care stores (e.g. drug stores), online and catalogue sales, and food and beverage stores.

We will have a clear view of the holiday shopping season by mid-January, when the Commerce Department releases December retail sales. An even more detailed breakdown—including the GAFO category—will be available in mid-February. For a more real-time read on holiday spending, we track two additional sources: the weekly chain-store sales reports and commentary from retail industry groups.

Weekly chain-store sales indexes from Johnson-Redbook and GS/ICSC provide timely quantitative information on holiday spending. However, these measures are highly volatile, they can be distorted by weather and other factors, and they do not always map well into the Commerce Department’s official estimate of retail sales. In addition, in previous years we have noticed a tendency for the chain-store indexes to decline in the weeks between Black Friday and Christmas, even after seasonal adjustment (Exhibit 3). This is not very surprising in light of the difficulty in seasonally adjusting weekly data, but the pattern seems to drive press commentary around holiday shopping and should be taken into account. Given that firms ramped up Black Friday promotional activity this year (e.g. with earlier opening times), the early-December lull could be especially pronounced.

Retail industry groups provide ongoing commentary on holiday sales as the season progresses—especially after Black Friday and other key shopping days—and occasionally update their forecasts. We tend to follow the commentary from the National Retail Federation (www.nrf.com), ICSC (holiday.icsc.org) and ShopperTrak (www.shoppertrak.com), as well as the views of our own retail analysts.

A few factors can complicate interpretation of industry commentary. For example, a secular trend toward online shopping means that growth rates in these categories are usually much higher than for seasonal spending as a whole—this year the ICSC expects 10% growth in online/mail order sales but only a 3% increase in GAFO sales. Growth in foot traffic also does not always translate well into sales.

Despite a few drawbacks, these resources provide helpful timely color on holiday sales. We forecast that real personal consumption expenditure will increase by 2.0% quarter-over-quarter annualized in the fourth quarter, or 1.8% yoy. Based on historical relationships, this would be consistent with holiday GAFO sales growth of about 3.0% yoy.