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Who's Well Positioned for Black Friday?

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar.

A lot of black ink has been spilled in the media over Black Friday, but just how important is this day and who is well positioned?

Joining me to offer some light on Black Friday is R.J. Hottovy. He is the director of consumer equity research for Morningstar.

Thanks for joining me R.J.

R.J. Hottovy: Thanks for having me.

Stipp: So a lot of attention on this one day. How important is this day for retailers, and by extension, how important is the holiday shopping season for them coming up?

Hottovy: I'd say, generally speaking, Black Friday is an important day, but there certainly are a number of other important days out there in the retail calendar. But I'd say, as a whole, the holiday season is critical for retailers, almost across the board--certain categories more than others, but certainly the holiday season can make or break to lot of retailers.

Stipp: I know a lot of shoppers are interested, and probably retail investors as well, on how promotional this holiday shopping season is going to be. What kind of discounts are folks going to see and how much are retailers going to have to mark down their merchandise?

Hottovy: All indications we're seeing so far in our own channel checks, our conversations with management, and just generally what we're seeing out there on the streets is that traffic is going to be up this Black Friday. I think there is generally a more willing consumer to spend this year. But at the same time, we do have concerns that this is going to be a very promotional holiday season, and retailers are really going to have to fight to get customers in the door.

So, our take and what we've seen in terms of inventory positions at the end of the third quarter, with retailers pulling the Black Friday promotions back earlier than we've ever seen before, we really think that even if we do see solid sales this period, we do have some concerns about the margin pressures that this promotional activity could have.

Stipp: I was going to ask you about the promotional activity. It does seem like every year they start to advertise earlier and earlier. And now we also have what they call Cyber Monday as well. So have you seen already a lot of activity just in sale prices and promotions that companies are doing?

Hottovy: Absolutely. This is the earliest I've ever seen a Black Friday promotion. We saw before Halloween this year, which was, frankly, the earliest I've ever seen it. And really what this means to us is that that retailers are concerned about clearing that inventory now as opposed to having to wait until right before the end of the holiday season and really mark down that inventory.

So, in our view, that's why we are concerned about the promotional activities. Again, part of it is to get as many sales early on, but just to clear that inventory before the deep discounts have to happen at the end of the season.

With respect to Cyber Monday, that's another one that, again, just that buzzword is so ingrained in consumers' minds these days, it's a way to get some buzz with a certain product. And again, we've seen Cyber Monday promotions way earlier than Cyber Monday this year.

Stipp: So, certainly something to watch. Now if you dig in a little bit and sort of look at the different categories within retail, are you seeing any trends from the budget retailers to the aspirational and the luxury brands? Is there anything that's shaking out differently among those groups?

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Hottovy: Certainly, one trend we're picking up on is I think some of the mass merchant and even consumer electronic focused retailers – three names in particular, we're looking at here is Wal-Mart, Target and Best Buy – I think anybody who has got Apple's iPad in store this year and the accessories that go along with it is poised for a big holiday season.

So, for companies like Wal-Mart and Target, we think they are actually poised to recapture some of that market share they may have lost to dollar stores over the past year or so. I think that's going to drive people into the stores, and hopefully, entice them to stick around and maybe make a couple of other holiday purchases at the same time.

Best Buy has a similar situation where they are poised to capitalize on a number of consumer electronic trends--iPad, motion gaming, a number of smartphone releases that we're seeing there. So, that's in terms of just the low-end consumer.

But in other sectors, we think aspirational luxury will do very well this year, certainly some luxury names. I think the middle- to upper-end consumers have seen enough stabilization, and we've a nice uptick in the equity markets at this point, too. It's given people some more comfort to get back out there and get in the store. I don't think they are going to be spending lavishly this season, but I think that certainly there will be some more spending there. And certain women's apparel retailers, too, there is some pent-up demand with those type of products as well.

Stipp: I was going to ask you about that because it seems like the consumer spending trend, there's been a lot of spending on electronics. In apparel, you hadn't heard as much about, do you think that some areas of apparel then have some brighter prospects for the holiday season?

Hottovy: Yeah. We think the women's apparel, that sector, that's certainly one that we've seen some mixed results throughout the year, and I think certainly there is some pent-up demand. Again, as things stabilize in the broader economy, I think that's where you start to see spending back in that particular channel.

Stipp: R.J., thanks for joining me today and thanks for your insights on Black Friday.

Hottovy: Thank you.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.