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By Jason Stipp | 11-22-2011 03:30 PM

A Less-Jolly Holiday for Retailers?

Holiday retail sales growth should decelerate this year as consumers' pent-up demand is tempered by uncertainty over the markets and stagnant wage growth, says Morningstar's R.J. Hottovy.

Jason Stipp: I'm Jason Stipp for Morningstar. It's Black Friday, and if you're watching this, you are not out shopping. But just how important is your business to retailers this year? Here to offer some insights is director of consumer equity research R.J. Hottovy to tell us a little bit about how important the holiday shopping season is to retailers.

Thanks for joining me, R.J.

R.J. Hottovy: Thank you.

Stipp: So, first question for you: We know that the holiday season is critical for all retailers, but looking at how retailers have done during this year, how important is this particular holiday shopping season? How critical is it?

Hottovy: As you mentioned, the holiday season, by that we define November and December, is critical for retailers. It usually accounts for about 30% to 40% of the annual sales, so you can make or break a year on your holiday sale plans.

This year, it's an important year, but I mean it's not a make or break situation for a lot of companies. I think really what we are looking for at Morningstar is a deceleration from last year. Last year was a pretty big year. The November and December timeframe yielded about a 5% increase in retail sales across the board--some more, some less--but that was the average.

This year we are looking for about a 3% gain in retail sales, and really I think what we're seeing is there's a lot of pent-up demand, but consumers are also balancing a number of macroeconomic pressures, stagnant wage growth, volatile asset markets, and generally just uncertainty with where things go in the economy from here.

Stipp: So consumers certainly are under a lot of pressure. We know one of the things they are very sensitive to are price changes. So we had some high-profile stories with Netflix having some trouble with some increases in their prices; Bank of America added fees and they had to take those away recently.

So just how much is that sensitivity, the consumer sensitivity, to price increases, going to play into pricing for retailers in the season?

Hottovy: I think retailers have been smart about not raising prices too quickly, but at the same time they are balancing a number of inflationary headwinds. For example, cotton is up on a multi-year high, down from its highs earlier in the year, but still at elevated levels. A number of the food companies, too. These are all inflationary headwinds that have to be passed on.

But at the same time I think retailers are smart and know that traffic has to be the first priority this holiday season, and so they're not going to raise prices too much, and I think they probably learned some lessons from a couple of these high media profile situations, and I don't think they're going to see too much of a price increase.

Really what we are thinking is that 3% is going to be driven a lot by traffic. We think that price increases that are already in the mix will be there, but largely negated by promotional offers that are out there or less units per transaction. So really that 3% is going to be driven a lot by growth, and I think retailers have done a smart job in not raising prices too quickly.

Stipp: What does the discounting environment looked like? It seems like earlier and earlier, we get the pre-Black Friday sales. Have you seen a lot of discounting so far just to get some of those initial shoppers in the door?

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