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The day after Thanksgiving, known in retail circles as "Black Friday," marks the unofficial kickoff of the holiday shopping season. The label is supposed to represent the exact day [or close to it] that retailers move "into the black" – become profitable – for the year. It is also the time that investors, analysts, and market pundits alike start speculating in earnest about the success [or failure] of the retail season and determine how to best play the markets.
The holiday shopping season is so closely watched because the fourth quarter – and the holiday shopping season – can account for 50% to 70% of retailers' sales and profits for the entire year. A bad holiday season can translate into a dismal year.
The recent same-store sales results, Wal-Mart Stores Inc. (WMT) earnings reports, and retail sales announcement all jumpstarted speculation for this season as investors look for a reason to buy or sell retailers [and related equities].
Of course, every year like clockwork, retailers start out very early in predicting "gloom and doom" for the holiday shopping season – as if to warn those investors and analysts not to be overly optimistic about future revenue. And this year seems to be no different. But could retailers just actually be trying to set expectations low so that they could subsequently surprise us with better-than-expected results? What moneymaking opportunities exist within their negativity? Can history serve as any kind of guide for the future? [Random walk theorists can stop reading here.]
A Stroll Down Memory Lane
Investors should remember that the 2006 holiday-shopping season followed this same nay-saying script. Unseasonably warm weather helped retailers forecast weak late-year sales as those winter wardrobes remained on store shelves. Energy prices hovered above historic norms, though some analysts believed that hedge fund-managers [remember Amaranth?] and other "speculators" were keeping prices artificially high. Concerned investors bought commodities as a natural hedge against inflation. The sluggish housing sector persisted and homeowners put off those major purchases until they became more comfortable about a rebound.
However, when the dust had settled and the calendar clicked over to 2007, the U.S. Commerce Department reported that retail sales activity in December rose by its biggest percentage in five months and, for the entire year, sales had climbed by a very solid 6%.
Furthermore, gift-card revenue isn't recognized until those cards are "redeemed" [in other words, until the money on the cards is swapped for gifts…. although retailers have had the cash for months], meaning sales activity months later added to the success of the holiday season. Oil prices plunged in the first few weeks of the year as the "unseasonably warm weather" finally was viewed favorably. In another words, the "gloom and doom" never materialized, the almighty consumer was alive and well in late 2006, and forward-thinking investors took advantage of some strong early year performances within the sector.
That was Then…This is Now [Or is It?]
For 2007, many retailers are [again] saying the holiday shopping season will severely lag prior years [and the reasons sound quite familiar]. After all, unseasonably warm weather has restricted buyers from updating their fashionable winter wardrobes. Oil prices have been hitting record setting levels; gasoline selling for more than $3 a gallon has put a major dent in consumer's pocketbooks, and investors are commodities such as gold as a hedge against inflation.
Despite some earlier-than-normal discounting, retailers ranging from Nordstrom Inc. (JWN) to Macy's Inc. (M), from Limited Brands Inc. (LTD) to Wal-Mart, reported disappointing same-store sales results in October. Some claim that housing woes [and now ongoing subprime mortgage woes] will restrict activities as consumers wait for some signs of a rebound.
Retail sales expanded at only a moderate pace in October, leaving analysts to grow increasingly concerned that retailers are facing a sub-par holiday season.
Total retail sales for the month increased 0.2%, which was in line with most estimates, but which represented a significant retreat from the upwardly revised 0.7% gain in September, according to figures released a week ago by the U.S. Commerce Department.
The sales increase was boosted by a 0.8% gain in gas station sales, thanks chiefly by higher prices at the gas pump. Excluding gasoline, retail sales were only up 0.1% – their smallest gain in four months.
What's more, consumer confidence is at its lowest level since the immediate aftermath of Hurricane Katrina.
Certain kinds of trucking companies can be excellent "leading indicators" of economic statistics, since they "ship" products purchased ordered by consumers, and also retailer inventories that have been drawn down by sales to consumers.
Trucking company YRC Worldwide Inc. (YRCW) and package-delivery giant FedEx Corp. (FDX) both are experiencing rough market conditions, YRC Chief Executive Officer Bill Zollars said Friday. YRC, based in Overland Park, Kansas, is the largest "less-than-truckload" trucking firm in the U.S. market, operating under such brand names as Yellow Transportation and Roadway. It announced a drop in third-quarter earnings on Oct. 25, citing weakness in the manufacturing, housing and retail sectors, Zollars told Dow Jones Newswires (DJ).
FedEx early Friday cut its earnings guidance for both its fiscal second quarter and the full fiscal year, citing high fuel costs and weak less-than-truckload trends, triggering share declines in the trucking sector. Less-than-truckload carriers consolidate freight for more than one customer in a single truck.
"It's gotten a little bit worse every month, and unfortunately that continues," Zollars said.
But before shorting all of those retail stocks, investors should remember last year and consider a few other pieces of data. The jobs market [sans the financial industry] has held up surprisingly well given the current credit concerns. In October, payroll additions were reported at the strongest level in five months and the unemployment rate stands near historic lows.
Inflation remains a concern, though certain energy analysts claim that speculators may be running amuck, supply issues do not justify the elevated prices, and an early 2008 pullback in oil may again be in the cards. A weak dollar has suddenly allowed "Made in America" goods to become much more affordable in overseas markets [at least to international consumers].
You can worry about energy prices, housing prices, the subprime crisis and other such problems, but the bottom line is jobs, says Joel Naroff, President and Chief Economist at Naroff Economic Advisors Inc., an economic-research firm based in Holland, Pa. And since employment remains strong and unemployment remains low, spending this holiday season shouldn't be the disaster than many naysayers are predicting.
"I think a few of the reservations related to the holiday season are likely to be proven to be overblown," Naroff told Money Morning in an interview last week. "Typically, when it comes to spending – especially holiday spending – it's really all about jobs, really all about incomes."
The "gift-card syndrome" has changed the nature of the retailing season. It may well spread, or space out, the shopping season. But the bottom line is that retailers still get the money, and that the activity is still there.
Despite the sluggish October same-store-sales numbers, Wal-Mart, the world's largest retailer, announced strong third-quarter profits and increased its earnings forecasts for the rest of the year. The U.S. economy, as measured by gross domestic product (GDP), grew by a larger-than-expected 3.9% in the third quarter and consumer spending was considered the primary driving force. While most analysts expect a slowdown in the coming quarters, many point to the recent U.S. Federal Reserve interest-rate reductions as proof that central bank Chairman Ben S. Bernanke and friends stand prepared to act should any signs of a slowdown [or even worse, signs of a recession] begin to appear.
Is the Sky, Indeed, Falling?
As you can clearly see, the arguments about this year's holiday shopping season sound like an "I Love Lucy" re-run of the gloomy predictions made last year. And, as we saw, consumers did not go into hibernation in 2006 and the season ended up being pretty decent for retailers [and for many investors, too].
Black Friday will soon be upon us and those deep discounts will go into effect. Retailers, stop your constant bellyaching. We're not buying it again this year. In other words…Cha Ching [or not].
Ron Brounes, CPA, is a technical financial writer and president of Brounes & Associates (www.ronbrounes.com), a Houston, Texas-based consulting firm that provides writing, communications and educational services for financial services professionals.
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