Jack Kleinhenz, chief economist for the National Retail Federation, has been making projections about consumer spending and other economic measures for more than 25 years—including 12 years at the NRF. Putting together the trade group’s annual holiday spending forecast is typically fairly routine, he says. But not this year. In fact, sorting out his 2022 predictions has been “damn difficult,” grouses Kleinhenz.
The primary thorn in the economist’s side is the same one that has been needling the rest of us: inflation. Among other things, Kleinhenz says, skyrocketing prices have made it difficult to suss out how consumers are spending—or not—their rapidly devaluing dollars. Add in the general volatility and uncertainty plaguing everything from stocks to interest rates to the job market, and you can understand why he and his fellow forecasters are at a bit of a loss.
Ultimately, Kleinhenz and the NRF suggest that shoppers will spend about 6% to 8% more during this holiday season than they did last year. Factor in inflation, which grew by 7.7% year over year in October, and the picture looks relatively flat. Other spending-watchers peg this year’s number a bit higher or lower, but one thing everyone agrees on is that this year won’t give retailers the same rosy holiday glow they got in 2021, when sales spiked by 13.5% to a record $889.3 billion.
Another question raised by this year’s tumult is whether that normally all-important holiday number will provide the usual insight into how consumers are feeling more broadly and how they might spend in the coming year. When the ground seems to be shifting under shoppers’ feet, does a willingness to splash out on holiday discounts (more on that later) really mean they’re going to keep spending after the tinsel and lights come down? Or is it more likely, as Wells Fargo (
“The consumer is ready to bite the bullet and spend this holiday season, at least on gifts for themselves and their families,” wrote Benchmark analyst Daniel Kurnos in a recent note. “Our concern is that holiday spend sees little follow-through.”
For investors looking for insight into which retail stocks are poised to perform next year, this holiday will be a bit more giving. With most analysts predicting a tougher operating environment on the way, the season offers companies a chance to right-size inventories and plant a flag in the ground on pricing. The upshot: How companies fare over the next several weeks will go a long way to setting up the winners and losers of 2023.
The record-breaking holiday of 2021 was fueled by shoppers emerging from the depths of the pandemic with money in the bank and fresh excitement to spend it. “The nostalgia, the sentiment, and the desire for that normalcy just seems to really have brought the holidays back to life,” says Katie Thomas, lead of the Kearney Consumer Institute. They flocked to malls and e-commerce sites flush with cash from stimulus checks, a roaring stock market, and robust savings accounts.
Today’s shoppers have a rather different balance sheet. Existing savings are still strong, with U.S. households having burned through only about a quarter of the $2.3 trillion they socked away during the pandemic, according to an economic analysis from the Federal Reserve. Yet the rate of new personal savings has nosedived, going from a high of 33.8% in April 2020 to 3.1% in September, its lowest point since 2008, according to data from the Bureau of Economic Analysis. Wages are rising (up 4.7% at an annual rate in October), but those gains have been quickly eroded by persistent inflation. Rents are up, stimulus checks are history, and the expanded child tax credit expired at the end of last year. That has weighed on shoppers’ outlook on the economy, with consumer sentiment now hovering close to historic lows.
Of course, all of the averages and nationwide statistics can say only so much about the way these larger trends are felt by individuals. For Katie Ziemer of Tehachapi, Calif., the impact of rising prices and unaffordable rents has forced big changes: Earlier this year, she and her family briefly moved back in with her parents to save on housing costs, and she has gone from stay-at-home mom to substitute teacher working toward a real estate license. This holiday, she’d love to skip presents altogether, but with three kids, “I know that won’t work,” says Ziemer. Instead, she’s thinking about handmade gifts, and is scouring the internet for deals.
But while inflation can be crippling for households with lower incomes, those on the upper end of the spectrum don’t feel its effects so keenly. And luckily for the industry, that’s also the segment that historically drives retail, with the top 20% of households by income accounting for nearly 40% of all consumer spending.
So far the well-off seem ready to open their wallets this season: Families with annual household incomes of over $120,000 are planning an average of $2,759 in holiday spending on gifts, travel, and entertainment, nearly double the U.S. average and up 15% year over year, according to a PricewaterhouseCoopers survey.
A question weighing on forecasters is whether that eagerness to spend will hold up in the face of falling real estate values and continued weakness in the stock market, two areas that tend to account for a disproportionate share of the wealth of high-net-worth consumers.
In the case of Liz Schupler, who was shopping at luxury mall Americana Manhasset in Long Island, N.Y., on an October Friday, the economic seams are starting to open. In addition to her work as an interior designer, Schupler runs a high-end Airbnb and says that bookings have softened lately. “I don’t see as many inquiries as I used to, and I think people are just being a little more cautious,” she says. That caution seems to be rubbing off, with Schupler saying she plans to do a “little less” holiday shopping than last year, due in part to concerns about a coming recession.
Retailers, too, are in quite a different place than they were in the run-up to last year’s holiday. In 2021, the Covid-related supply-chain kinks were still causing shortages, allowing companies to keep prices high as consumers scrambled to tick gifts off their shopping lists. This year, those backlogged orders have been filled—and then some. Retailers were sitting on over $740 billion of inventory as of September, up 22% from the same period in 2021. Now, they’re faced with the daunting task of getting rid of the bloat at the very moment that consumers are starting to think about paring back spending.
That means discounts. Black Friday, the traditional start of holiday sale shopping, is no longer the retail bellwether it once was; this year, just 20% of consumers said they were planning to shop on the day after Thanksgiving, down from 60% in 2015, according to PwC. Instead, the discounting season sprawls across the second half of the year. Inventory-flooded retailers got started earlier than ever this year, with Target (
Dropping prices will drive sales, say analysts, but it won’t rescue profit margins. Until recently, most retailers had been able to pass rising costs for production and shipping on to shoppers. Inflation and eroded consumer confidence are eating away at that strategy, with some companies already warning investors not to expect the fat numbers they saw last year. Nike (
For long-term investors, the best retail bets may be those willing to steer clear of major discounting, even if that means a lackluster holiday. “We believe [that companies] that can stomach the balance-sheet costs and short-term muted top line can be better suited to hold back promotions and maintain the brand elevation earned over the past couple of years,” writes BMO Capital Markets analyst Simeon Siegel.
Siegel points to companies like Ulta Beauty (
Another option is to lean in to the supply glut and bet on those poised to benefit from the excess inventory sloshing around. Many unsold goods end up on the racks at off-price retailers like TJX (
According to a UBS study, discount stores are the main channel through which Americans said they were planning to shop for gifts this holiday. This is the first time since 2014 that discounters placed above department stores in the annual survey.
That hints at another trend that investors should watch: “retail bifurcation,” in which shoppers gravitate to stores on the extreme ends of the price scale. “The middle oftentimes is a tough spot and can get squeezed,” says Stephen Sadove, senior advisor for Mastercard and former chair and CEO of Saks.
Bifurcation isn’t a new phenomenon, but given the divide in the way inflation and other economic forces are affecting upper- and lower-income Americans, it’s no surprise that analysts expect to see it shift into hyperdrive this year. While the rich have shown they’re still ready to splurge on luxury products, many others have moved to “trade down” mode, switching from name brands to private labels, gravitating toward dollar stores or discounters, and taking other cost-cutting steps.
These behavioral shifts could benefit companies that have built a brand around providing value, such as Walmart, Dollar General (
Full-priced specialty stores, including department stores and other mall-based retailers, may be left in the lurch, says Mari Shor, senior analyst at Columbia Threadneedle. “Those are the players that are likely to see the biggest negative impact because they don’t offer the same broad assortment and value,” Shor says. That has led many analysts to turn bearish on this subsector heading into the fourth quarter. BofA’s Hutchinson, for example, has an Underperform rating on Gap (
The larger question of what the 2022 holiday season will tell us about future retail industry prospects is perhaps less about what kind of revenue companies rack up in the final months of the year, and more about what their warehouses and balance sheets look like on Jan. 1.
“The strength of the holiday season this year is going to determine how clean the retailers enter the new year,” says Shor. “This is really going to dictate the degree to which they’re able to capture margin next year.”
With many economists forecasting a recession, or at least a troubled economic environment, next year, retailers that enter 2023 with right-size inventories will have more pricing power and operating flexibility to respond to whatever the new year throws at them.
As for shoppers, few economy watchers are willing to suggest that a strong holiday season would say much about how U.S. consumers will behave in 2023. (One particularly keen observer that might disagree: the Federal Reserve.) With many Americans at a tipping point—strong personal balance sheets showing early signs of weakening, and good feelings about the current state of the economy offset by concerns about the future—analysts are leaning toward that old hedge: Past (or current) performance may not be indicative of future results.
But there is something of a Grinch take here: While meeting holiday sales expectations won’t woo analysts, failing to would get their attention. Says Moody’s chief economist Mark Zandi: “If Christmas turns out to be a bust, or worse than I’m anticipating, then my year-end 2023 in general will be significantly darker.”
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