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Holiday shoppers aren’t in a rush. What that means for retail stocks

If you’re a retailer, and it’s the holiday season, the thing you most want consumers to feel is a sense of urgency. This year, forget about it. Unlike last year, holiday shoppers don’t need to fear empty shelves at the store. The supply chain bottlenecks have largely been resolved, and some retailers have too much inventory. Parents won’t be fighting over a must-have holiday toy. There isn’t one. And even seeing the words “Black Friday,” may cause eyes to glaze over. Consumers have been hearing about doorbuster deals since early October. “We are not seeing a sense of urgency. Period,” said Julie Ramhold, a consumer analyst with online shopping site While there’s still a “healthy” interest in shopping, there isn’t any pressure to buy, Ramhold said. One reason is the lack of must-have gifts, she said. But also, after months of higher prices for gasoline, food and rent, shoppers are waiting — and watching — and making sure they are getting the best deal possible. “It’s a tough position to be in,” she said. “A lot of families will be getting together for the first time in a while, and they don’t want to skimp, but they don’t have the budget.” Investors will need to be equally careful with their money. As this week’s batch of retail earnings reports showed, there will be clear winners and losers . Making the right picks will likely come down to finding well-managed companies that are reacting quickly to changes in consumer behavior, industry watchers said. Companies that are perceived as offering great value — not just low prices — should also be on the shopping list, they said. And it doesn’t hurt if the retailer caters to higher income consumers, who will have bigger budgets and less sensitivity to inflation, or if the retailer sells items that are deemed to be more essential, like food. A very ‘meh’ Christmas The retail industry’s trade group, the National Retail Federation, estimated holiday sales would rise between 6% and 8% from last year to between $942.6 billion and $960.4 billion. Other forecasts are also hovering around this range. While that growth rate may seem like a solid showing compared with the average annual increase of 4.9% over the past decade, the forecast loses its luster when one considers the impact of inflation. For much of the year, inflation has been up around 8% or more. So after adjustments, the real gains are about flat or down. Katie Thomas, who leads the Kearny Consumer Institute, an internal think tank at global strategy and management consulting firm Kearney, said she is “optimistic” about the holiday season even though she expects consumers to be “very tactical” in their spending. “They went to Walmart because there’s a great perception of value there — even among the high income consumers,” she said, referring to the discount retailer’s fiscal third-quarter results on Tuesday. Walmart said it saw more shoppers with incomes above $100,000 ring up items in its stores, drawn in by less expensive groceries. According to Goldman Sachs research published Friday, Walmart’s prices were not only lower than its competitors in its Nov. 14 grocery survey, the gap between Walmart and its rivals is widening from a prior survey. Walmart’s prices were 12.5% lower than the average prices of its competitors, Goldman Sachs said, based on a basket of 38 items across a number of different categories. It surveyed six different grocery brands for the report. Dollar General had the next lowest basket, with its average prices 6.4% below the group’s. The dollar store is among the retailers expected to benefit from shoppers trading down over the holidays. Its stock is up 9% since the start of the year. Don’t get stuck in the middle “This holiday season, if I’m a retailer in the middle — in the middle between discount and luxury — I’m really worried this could be the first real struggle … that we’ve seen in a long time,” said Jake Dollarhide, CEO of Longbow Asset Management. He suggests investors position themselves in discounters like Walmart or Family Dollar or in luxury stocks like RH or Lululemon . Walmart has been trying to play both ends of the market, according to Dollarhide. He cited a partnership the company struck with American Express , where Platinum cardholders can get a free membership to Walmart+, which includes home grocery delivery. “Walmart’s not sleeping on its laurels,” he said. Target’s positioning is working against it, according to Kearney’s Thomas. She explained that many shoppers perceive Target as a place where “you go in for two items and come out $150 later.” That perception speaks to the idea that many shoppers have a hard time resisting impulse purchases at Target, and may avoid it if they want to stick to their budget. The desire to get a good value will direct spending in the coming weeks, according to Thomas. She cited fast fashion brands as an example of the type of company that could struggle, saying that retailers who sell premium products will be better positioned. Beauty products should also sell well, she said. That would help companies like Sephora and Ulta , which roll out gift sets at a variety of price levels over the holidays. Lotis Blue Consulting CEO Garrett Sheridan said he has seen a bifurcation among consumers, where shoppers with lower incomes are strapped for cash amid widespread inflation. At the same time, “luxury goods are going gangbusters,” he said. Sheridan said this has meant companies like Levi Strauss have seen products selling well in channels that cater to higher income consumers because the iconic denim brand offers shoppers a good value. But in more price-sensitive channels, sales are under pressure, he said. In October, Levi lowered its fiscal 2022 forecast as inventories built up, forcing it to cut prices. Its stock is down 37% so far this year. Sheridan’s main concern is that consumers may overextend themselves this holiday season by using “buy now pay later” services or taking on credit card debt. If that occurs, he expects it will weigh on spending in the new year. Indeed, the Federal Reserve said Tuesday that household debt rose at its fastest clip in 15 years as credit card usage and mortgage balances grew in the third quarter. That’s one sign of potential stress. But there are more. Jonathan Sharp, managing director at Alvarez & Marsal Consumer Retail Group, a global professional services firm, said consumer sentiment has deteriorated in research his firm has done this fall . “Their inflation concerns have grown since the spring and their inflation expectations are arguably now worse for the next six months than the financial market’s inflation expectations,” Sharp said. “… For retailers, that kind of expectation … drives the reality for retailers.” He said he was surprised by how much consumers have shifted to a “hunkering down kind of spend mentality.” In a survey Sharp did six months ago, consumers were still interested in spending on experiences like travel, restaurants and events. But recent polling shows attitudes are changing and they are delaying spending. When Target released its results Wednesday, it called out a “precipitous decline” in spending at its stores in late October. It said trends have continued to be weak into November. This could be a reflection of the souring sentiment Sharp picked up on in his research, which was released this week. It also reflects the behavior’s Ramhold has seen. Sharp said retailers will be successful when they give consumers reasons to shop. “They’re going to have to create far more bundled deals, they’re going to have to create a lot more excitement about scarcity and ‘when it’s gone, it’s gone,'” he said. And it might be why NRF is predicting a jump in the number of people shopping between Thanksgiving and Cyber Monday this year. Their estimate of 166.3 million shoppers next weekend is higher than last year and would be the largest turnout since the group starting tracking this data in 2017. As for Target, even with its recent troubles, there still could be some upside much further down the road. The company is planning to cut $3 billion in total costs over the next three years , which could make it more efficient in the future. Sheridan, of Lotis Blue, which was formerly known as Axiom Consulting Partners, said Target isn’t alone in looking to streamline its business. He said retailers saw these challenging conditions coming and have been examining their operations for places to cut costs. Still, these types of operational improvements can take eight to 12 months to show their benefits, he said.

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