Holiday Sales Growth Will Surprise Retailers

Keeping costs in check will be the key to a profitable holiday season.

Retailers aren’t too jolly about the holiday season and are being cautious in stocking inventory. But they may be pleasantly surprised with modest sales gains over last year, as the fears of another recession fail to stop most consumers from spending more.

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Back-to-school sales disappointed most merchants, and consumer confidence hovers around a 20-month low. Buyers are careful heading into the busiest time of the year for retail, when some companies make as much as 50% of their annual sales. With unemployment stubbornly stuck above 9% and families’ income, after inflation, stuck at 1996 levels, tightfisted shoppers wouldn’t be a shock.

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But stores are likely to see sales growth of 5% this holiday season. While that’s not quite as good as last year’s 7% jump in sales during November and December, it’s better than most anticipate, given the sluggish economy. ShopperTrak, an early forecaster of holiday sales, expects a 3% increase in sales this holiday season, while the International Council of Shopping Centers forecasts a 3.5% gain in holiday shopping.

The 2011 holiday season may be a reprise of 2009, when fourth quarter retail profits zoomed past expectations to a healthy $24 billion, thanks to controlled costs and tempered sales forecasts. In an improved economy during the fourth quarter of 2010, retailers were more optimistic, but not vigilant enough about keeping inventory levels and operating costs in check. Thus, profits weren’t as good, with large retailers reporting $22.4 billion in profits in the last quarter of 2010.

So far though, retailers are showing restraint in hiring temporary, seasonal workers and increasing inventory levels. Shipping data show retailers are willing to keep stock levels tight and put off additional buying decisions until they see sure signs of spending. Purchasing managers will hold off placing reorders till they’re sure supplies won’t be left on shelves. They’ll prefer the risk of foregoing additional sales to the deep discounts they were forced to take in 2008, when the economy tanked. That’s bad news for bargain-hunting consumers.

Retailers are already being extra cautious about hiring, with just an 8% upward bump expected from the number of jobs added in the fourth quarter last year. Seasonal retail employment will grow to about 680,000. That’s still 7% fewer jobs added during retailers’ make-or-break quarter in 2007. And fewer of those hires will get the chance for a full-time gig in 2012.

Three-quarters of retailers expect the same staff levels or higher this year. Many department and discount stores are expecting to hire more seasonal workers. Macy’s, for one, expects to hire 4% more workers this year than last, for a total of 78,000 seasonal workers. Target is planning on hiring 92,000 workers this year, also up from last year’s seasonal hiring. JC Penney and Kohl’s both expect hiring to be on par with last year.

Lower gasoline prices this fall will help encourage consumers to spend more during the holiday season. Pump prices will slip to about $3 a gallon by the beginning of November…about a buck a gallon lower than earlier this year and 50¢ a gallon lower than the national average just two weeks ago. The most recent drop in prices will put over $17 billion into the economy during the fourth quarter, delivering a wallop to the amount of cash consumers have to spend on the holidays.

Consumer confidence is likely to rebound a bit in the coming months. Political bickering, sovereign debt downgrades in the U.S. and abroad, plus volatility in the stock markets weighed on consumers into September.

Note, too, there’s a disconnect between consumer confidence and actual spending: Though confidence measures plunged in August, Americans actually spent a bit more that month than in July.

Exclusive designer deals and value pricing will also help lure shoppers. Target’s discounted collection from Italian designer Missoni showed unique brands will draw customers. Buyers brought down the company’s website on the first day of sales, with shoppers’ demand reaching Black Friday-like levels. Kohl’s, JC Penney, Sears and Kmart will all sell discounted designer lines this year.

Online revenues will be up 10% this holiday season and help push overall sales higher. E-commerce is expected to make up 15% of all retail sales in November and December. That’s up from a 13% share of sales in 2010. Retailers will push online-only deals earlier this year. Plus, deal sites like Groupon and LivingSocial will see record sales levels by holiday gift buyers looking for deals.

Karen Mracek
Associate Editor, The Kiplinger Letter