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January's retail sales figures will overstate the pace of consumer spending. The monthly sales report, due out in mid-February, is likely to show heady gains in the 4% to 6% range for retailers. Clement winter weather in much of the U.S. will probably play a small part by lowering consumers' fuel costs and leaving them with a bit more cash to spend in stores.
But the main factor in January will be the redemption of an abundance of gift cards sold during late November and December 2006. In essence, the redeemed cards are delayed holiday sales, which will make the retail sector look healthier than it really is at the beginning of the year. Consumers bought $36 billion in gift cards—most of which will be used for purchases this month—up from about $29 billion during the 2005 season.
Look for retail sales to rise about 3.5% this year after a 4% increase in 2006 and 5% the previous year. Apparel, a big chunk of retail activity, is going to be a big weak spot. "People are saying most of what they see is ho-hum," so they're unwilling to spend as much on their wardrobes, says Britt Beemer, chairman of America's Research Group, a retail consulting firm.
Beemer says retailers are aware of the style deficit. Even so, with many chains publicly owned and attuned to Wall Street's short-term view on earnings, he says that most retailers conclude that "it's easier to sell more-conservative merchandise and cut costs to get moderate growth than gamble with merchandise that may be a huge seller or a flop."
Wal-Mart, the nation's largest retailer, will slog through another modest year with a sales increase of around 2.5%. Its core customer base of lower-income consumers will face still-elevated gasoline and electricity costs, albeit slightly lower than last year. Wal-Mart also is struggling to recapture many customers who went elsewhere after the retailer adopted an upscale apparel strategy aimed at more-affluent shoppers.
Middle-market department stores will ring up 2% to 4% higher sales this year, with Federated Department Stores and J.C. Penney leading the pack and Sears Holdings, Dillard's and Kohl's trailing behind.
Target's sales will be up around 5%. Its mix of low-priced and moderately upscale choices in apparel, bath goods, housewares and consumer electronics continues to siphon off department store shoppers.
This year likely may be the last gasp for the beleaguered Gap chain. After another holiday season of sinking sales, Gap is likely to be broken up. Its three divisions—Old Navy, Gap and Banana Republic—are almost certain to be sold individually to investor groups.
Luxury merchants' sales will soar as upper-incomers continue to reap the benefits of a strong stock market, dividends and hefty bonus checks they received at the end of last year. Nordstrom, Neiman Marcus and Saks Fifth Avenue should ring up sales gains of at least 7%, even if gas pump prices plow past $3 a gallon this summer. Upscale clientele are little affected by fuel outlays.
Web sales will continue their torrid increases, climbing 17% this year to around $111 billion and capturing 5% of total retail sales, up from 4.8% last year. Consumers are increasingly comfortable with buying products online, while many retailers are upgrading their Web sites to attract more buyers—merchandise previews are more lifelike, consumers' reviews can be accessed and purchasing processes are getting faster.
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