Reported holiday sales have for the most part been better than expected (see here for the scorecard with results from 55 chains), but that spending was driven by a consumer that is again taking on more debt and saving less, while personal incomes have barely kept up with inflation.

Consumer borrowing surged in November posting the largest monthly gain in a decade, with credit card debt increasing by the most since March 2008. In addition, the savings rate dipped to 3.5% in November, which was the lowest since 2007. While confidence has improved with recent economic readings and stock prices, expect consumers to retrench in the first quarter following the holiday splurge.

While most headlines note the strength of top-line results, dig a little deeper and you will find underlying weakness. We have seen more profit warnings than any time since the recession from the likes of Target, JC Penney and Kohl’s on the low-end. Even apparel chains that saw robust gains over last year such as American Eagle Outfitters (sales +15%, comps +12%) and American Apparel (sales +15%, comps +12%) are expected to report a significantly smaller profit than projected just a few weeks ago.

Due to the extremely competitive environment, free shipping offers, and deep discounting and promotional activity focused around Black Friday weekend and the week leading up to Christmas, these sales gains came at the expense of margins.

Perhaps most worrying of all is the significant sequential slowdown in sales and lowered guidance from Tiffany yesterday. Luxury chains have enjoyed an extraordinary rebound following the recession and seemed immune to cautious consumers, economic uncertainty and the European debt woes. Michael J. Kowalski, chairman & CEO, said “sales weakened markedly in the United States and Europe during the holiday season, reflecting restrained spending by consumers for fine jewelry,”

There were some chains that truly enjoyed a fruitful holiday: some strong performers included Macy’s, Zumiez, TJX & Ross Stores, Ulta Salon, lululemon athletica, Francesca’s, DSW & Genesco and Ascena Retail Group. These names offered the best product and were best able to balance the price/value relationship, allowing them to gain market share and expand margins.


Wednesday’s Top Retail & Consumer Reads:

• An Interview With New Costco President & CEO Craig Jelinek (Motley Fool)
• Dollar Stores Have Room For Continued Growth in the U.S. (Bloomberg)
• Mobile Shopping Doubles Over December 2011 Holiday (IBM Smarter Commerce)
• More Health Clinics Popping Up Inside Retailers & Grocers (NY Times)
• DSW Lifts 2011 Earnings Outlook, To Accelerate Store Openings (Nasdaq)
• Retail seasonal hiring near pre-recession levels (CNBC)
• Advanced Use of Mobile for Retail Remains on the Horizon (eMarketer)
• What’s Behind Target’s Recent Split With Advertising Agency? (AdAge)
• Many Retailers’ online ordering, shipping and returns processes fall short (Kurt Salmon)
• Action-sports brand Volcom aspires to raise the fashion bar for juniors swim (ApparelNews)
• Evidence mounts consumers are shopping competitors inside stores (Internet Retailer)
• U.S. Retailers Need to Up Their Game on Multichannel Efforts (Gartner)
• Though holiday sales gains were impressive, ‘Groupon Effect’ clipped American Apparel profit (NY Post)
• Comprehensive Analysis of 25 U.S. High Yield Retail Sector Issuers (Fitch Ratings)
• The Container Store CEO talks Conscious Capitalism (Retail’s Big Blog)
• U.S. Mobile Email Audience Grows by 28% in the Past Year (comScore)
• India Lets Foreign Retailers Open Wholly Owned Stores After Rule Reversal (Bloomberg)

If you are interested in meeting one of our Managing Partners to learn more about our products/services or just to discuss our view on the state of the retail industry in 2012, feel free to contact us:

info@retailsails.com

Marc Heller – mh@retailsails.com or on his cell (516) 316-3022

Total net sales for the 23 chains we track increased 5.6% from a year ago to $53.98 billion in December, while same-store sales rose 3.6% on top of a 3.3% gain last year – this was the 28th straight monthly gain after 12 consecutive months of declines.

However, it was a month of winners and losers as only 15 of 23 chains reported comp gains for the month compared to 19 last December. Total holiday season (November-December) sales increased 4.9% to $90.095 billion and comparable store sales rose 3.4% following a 4.2% increase in 2010.

Most holiday business was driven by strong foot traffic and sales during Black Friday weekend and the week leading up to Christmas, with a lull in between, as retailers pulled out all the stops with expanded store hours and aggressive discounts.

Online sales were consistently strong throughout the season, rising 15% to $37.2 billion over last year according to comScore. Macy’s said e-commerce sales jumped 40.3% in the November-December period, while Kohl’s reported a 48% jump in December and said online sales are on track to surpass $1 billion for the year. However, over 90% of chains were forced to offer free shipping throughout the season due to fierce competition from the likes of Amazon, which means the strong online sales will not be the panacea many were hoping for as margins will be thin.

Warmer weather and a lack of any major storms had a significant negative impact on sales of winter-related merchandise, leading many chains to resort to heavy discounting in mid-December, and we saw up to 70-80% off heavy gauge sweaters and outerwear in the week after Christmas. According to Weather Trends International, national temperatures were higher than last year and their long term average for almost all of November and December.

Just about every chain mentioned weak winter gear sales and echoed Tony Buccina, Vice Chairman, President – Merchandising of Bon-Ton, who commented, “December sales and margin were negatively impacted by unseasonably mild weather in all our markets throughout the month.”

Standouts included pretty much the same names we have seen out-perform all year: Costco (+7%), The Buckle (+8.9%), Zumiez (+10.0%) and Limited Brands (+7%); Off-price stores TJX (+8%) and Ross Stores (+9%) who continue to offer the best value proposition and take market share; high-end chains Nordstrom (+8.7%) and Saks (+5.8%) which are able to push full-price selling and have yet to see a much of a slowdown in affluents’ spending; and Macy’s (+6.2%) who absolutely destroyed rivals during the holidays and continues to be the best name in the department store space.

Laggards in December included all the usual suspects:

The Gap (-4%), who badly missed expectations and once again said “our performance was below our expectations,” JC Penney (+0.3%) who slashed 4th quarter guidance on much weaker-than-expected sales, Kohl’s (-0.1%), who also trimmed guidance fairly significantly, and Target (+1.6%), which is obviously losing its everyday low-price leader war with Walmart and missed expectations once again.

click on company below for detailed monthly performance data

For the most part, retailers were very cautious heading into November, with the lowest inventories on record relative to sales. This probably limited the panic discounting we saw back in late 2008, but there were still a surprising amount of earnings warnings from the likes of JC Penney, Target and Kohl’s.

While overall holiday season sales came in better than expected and consumer confidence continues to improve, we remain very concerned about the “resiliency” of consumers heading into the new year, especially considering the popularity of layaway purchases and the savings rate returning to recessionary lows.

Over the past three and half years, growth in U.S. consumer spending has averaged a paltry 0.2% adjusted for inflation, the weakest in the post-World War II period. Add to that the fact personal income has barely kept up with inflation since the end of the recession for most Americans, and it’s easy to see why the spending binge we saw over the holiday probably won’t last.

In addition, a bunch of other chains that typically only release results quarterly will provide insights into holiday performance over the next week or so, including Best Buy, GameStop, Tiffany, Toys ‘R’ Us and Urban Outfitters.

In anticipation, we will be hosting a free live conference call tomorrow morning at 11:30 to preview December comps and talk about our observations regarding the holiday retail season. See details below if you are interested in joining, or check back later tomorrow for a recording of the call.


Conference Call Details

Time: Wednesday, Jan 4th 11:30AM EST

Dial-In: (218) 632-0550

Participant Access Code: 621797#