US Videos

A Good, But Not Great, Holiday for Retailers

Jason Stipp
R.J. Hottovy, CFA

Jason Stipp: I'm Jason Stipp for Morningstar. It's Black Friday today kicking off the official retail holiday shopping season, though I think some retailers got a jumpstart this season.

Here to talk about the prospects for retailers on the holiday shopping is R.J. Hottovy, our director of consumer equity Research.

Thanks for joining me, R.J.

R.J. Hottovy: Thanks, Jason.

Stipp: First question, we have seen retailers opening on Thanksgiving, I saw an ad for "all November Black Fridays." Is the importance of this one single day to retailers diminished over time?

Hottovy: I think so. What we've seen over the last couple years is that, as you mentioned, retailers are starting earlier and earlier in the holiday season, but there is still a strong emotional attachment with the phrase "Black Friday," and so what we see is a lot of retailers trying to capitalize on that, starting Black Friday sales as early as October, and we're starting to see that from more and more different retailers too, not just bricks-and-mortar retailers, but we've been seeing it from Amazon and a lot of the online players as well.

Stipp: The National Retail Federation put a report out, and they said they expect a little over 4% growth this holiday season. Does that jibe with what you're expecting for holiday retail sale receipts?

Hottovy: Generally what Morningstar is expecting is between 3% and 4% growth this holiday season. We're categorizing it as a good but not great holiday season. Last year was a pretty strong holiday season from Black Friday through Christmas.

This year we think that when you're lapping those tough comparisons, plus combined with all price competition that we’re going to see in the market this year. A number of retailers--Best Buy, Target, Walmart--have all announced price matching initiatives to varying degrees. When you throw that all together, it's probably going to be a 3%-4% growth year, but not quite as strong as we saw last year.

Stipp: So, good but not great. When you look under the surface, though, are there any areas … of particular strength for certain types of goods or certain types of retailers, and any areas that might be a little bit weaker?

Read Full Transcript

Hottovy: I think the old standbys this holiday season are going to be continue to be strong, and that’s portable electronics. Best Buy's management commented that 75% of consumers out there plan to buy some sort of portable electronic devices this holiday season. So, tablets, e-readers, smartphones, I think, will be key categories once again this year. I think video games will do well, too. We've got a couple of new platforms on that side. We also think home improvement and home furnishing goods might actually be something that has a bit of a comeback this year with what we're starting to see in terms of stabilization in the housing market. So a retailer like Williams-Sonoma might do very well, but overall we think it's going to be a fixation on which retailers can give consumers the best value, all in all.

In terms of weaker categories, I'm not seeing anything per se, but what we're seeing … from the higher-end consumer, which really has been driving a lot of the retail sales and overall economy the last couple years, there is some concern about the fiscal cliff, and so there might be a slight deceleration on some of those luxury items this holiday season.

Stipp: You mentioned Amazon and some of the online retailers before. How do you expect them to fare versus the brick-and-mortar stores? Are they going to have an edge this season?

Hottovy: I think we're going to see continued shift to online sales this year, and I think Amazon will have a good holiday season. I'm hesitant to call it a great one, but I think they'll certainly have a good season, where you see a lot of people, a lot of consumers, gravitate to Amazon and other online channels. We're expecting mid-teen growth for the holiday season this year in online sales.

That said, there are a number of retailers who are starting to become more aggressive on pricing this year to stem the losses. On top of that, too, a number of retailers are also getting creative with their own online platforms to compete with Amazon as well--offering same-day shipping, exclusive products online. So, it hasn't been lost on a lot of brick-and-mortar retailers that you have to have a competitive online presence as well.

Stipp: So, you mentioned overall that we're probably going to see some price competition. When you look at some of factors behind that, like inventories and when in the past we've seen pricing get really aggressive, when do you expect to see prices come down and to what extent do you think they may come down over this season?

Hottovy: Inventories right now are in a pretty clean position across most of the retail. Retailers have been much smarter about not getting themselves into situations where they have to resort to extreme markdowns right before the holiday season, which is traditionally just as much part of Christmas as anything else.

This year I don't think we're going to see much of that. I think you're going to start with a pretty low price point or a competitive price point right away, but I don't think you're going to see the aggressive markdowns. You might see some right before the end of the holiday period, but honestly, I think that inventories are so lean right now, it's not going to be that year where you're going to see the 60% to 70% off, unless it's certain categories that just aren't selling.

Stipp: What about the consumer sentiment and also the consumer willingness to pay up for certain things? Are consumers just really rejecting any price increases or pricing power that retailers have tried to put on recently?

Hottovy: I think we saw last year where consumers were willing to tolerate some price increases, and a lot of that was just because it was so broad-based across all retailers to fight increased commodity costs. This year we haven't seen as much in terms of the commodity-cost side, so I think what we're going to see is a lot less retailers actually raising prices, and by extension we're going to see a lot of consumers who are unwilling to pay any higher prices. So, it's all about that everyday value and getting it at cheapest prices, which I think favors a lot of retailers like Amazon, Walmart, Target--companies with lower cost structures than a lot of their specialty peers.

Stipp: R.J., it's always interesting to watch the retailers in this all-important holiday season. Thanks for the insights on the dynamics this year.

Hottovy: No problem. Thanks, Jason.

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