Holiday shopping is a big deal for retailers (and their stocks). Having the right amount of the right gifts can make or break an entire year for a retail outlet. This year, however, it isn’t all about the merchandising. Management teams (and investors) have one additional factor to consider when thinking about holiday sales: the calendar.
Black Friday—the unofficial start of holiday shopping season—took place on Friday, Nov. 23 in 2018. Black Friday 2019 takes place on Nov. 29. Holiday shopping season this year is six days shorter than last year. (Barron’s math shows six days is almost a full week.)
Thanksgiving happens late this year. And that might be a problem for retailers. A majority of the sector earns a majority of earnings in the fourth quarter. Consider, 10 retailers with aggregate sales of $1.1 trillion generate about 36% of full year earnings in the fiscal fourth quarter of the year. The holiday shopping season really is a big deal.
On a sale-weighted basis the percentage dropped to about 27%. There is less seasonality in home improvement and discount chains. Home Depot (HD), for instance, earns most of its money in the Spring—ahead of summer building and remodel season. Earnings at Walmart (WMT)—the $500 billion retail behemoth—are more balanced quarter to quarter.
Discounters, grocers and home improvement may not feel the holiday heat, but department stores and specialty retailers do. Of the 10 examples cited, those retailers earn more than 45% of full-year earnings in the quarter encompassing the holidays. Macy’s (M)—the Thanksgiving Day parade sponsor—is expected to earn about 70% of full-year earnings during its fiscal fourth quarter, according to Wall Street consensus estimates. And there is a season for luxury. Tiffany (TIF), which has agreed to be acquired, is expected to earn about 38% of full-year earnings in its fiscal fourth quarter.
Curiously, the data also show this is not a big season for e-commerce—at least from an earnings-per-share perspective. Amazon.com (AMZN) is expected to earn less than 20% of full-year 2019 earnings in the fourth quarter, although the ratio of quarterly to full-year earnings at the retailing giant has fluctuated through the years. Amazon’s rapid growth and business diversity skews comparisons.
So should investors be worried about 2019 holiday same-store sales and avoid investing in the sector altogether? Or perhaps the late start to holiday-shopping season is a positive—jamming more sales into the month of December.
“I’ve always believed that a shorter window between Thanksgiving and Christmas lends itself as a convenient excuse for those under duress and a nonevent for the winners,” Gordon Haskett retail analyst Chuck Grom tells Barron’s. “With online shopping growing in popularity, I think consumers continue to shop earlier into November, and don’t look at Black Friday as they signal point to begin their purchasing.” Of course, any big storms which occur over the three key weekends after Black Friday can have a big impact on bricks-and-mortar retail, adds Grom.
He doesn’t cover all 10 retailers listed. He does recommend purchase of Target (TGT), Home Depot, Williams-Sonoma (WSM), and Walmart. Grom rates Kohl’s (KSS), Nordstrom (JWN), and Macy’s stock at Hold.
“There is potential for volatility, but investors should (and do) look through it either way,” said another Wall Street analyst when asked about shifting sales from one month to another because of holiday schedules.
It’s likely that the winners will stay the winners and the struggling retailers will continue to work to adapt to e-commerce and omnichannel trends. The calendar shouldn’t help—or hurt—in the long run.
(Omnichannel refers to filling online orders from existing store footprints and offering delivery and pickup options. It’s the merging of old retail and e-commerce trends to enhance the customer experience.)
One final note. Barron’s didn’t forget about another major retailer: Costco Wholesale (COST). Its fiscal year-end is in August. One of its quarters ends in November and another ends in February. Such scheduling is one way to avoid the seasonality discussion in retail.
Retail stocks, in aggregate, are trailing the broader market. The S&P Retail Select Industry Index is up 8% year to date, far worse than the comparable gains of the S&P 500 (.SPX) and Dow Jones Industrial Average (.DJI) over the same span.
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