FTI: Holidays Will Bring Retailers More Than Coal

WEST PALM BEACH, FL-Retailers may find more than coal in their stockings this holiday season, predicts FTI Consulting. Notwithstanding slow growth in discretionary spending and continuing jitters over political turmoil in the nation's capital, FTI is forecasting a 4.9% year-over-year increase in holiday sales.

“Our forecast for 2013 holiday sales indicates that this will be an average year by historical standards, but, nonetheless, one with which we suspect most retailers will be pleased,” says Robert Duffy, global leader of FTI's retail & consumer products practice and global co-leader of its corporate finance/restructuring segment. He cites a historic “trend of resiliency in the sector, even in years of economic weakness or mild contraction, and we expect this to continue during the holiday season as retailers actively court consumers through aggressive promotions.”

That being said, FTI cautions that retailers' gross margins will face continuing pressure from aggressive promotional activity. Stores will need to strike a balance, judging how to approach holiday markdowns without jeopardizing seasonal profitability.

A decline in EBITDA margins during the past two holiday seasons demonstrates that large retailers have been willing to sacrifice gross margins for incremental sales growth, and margin pressure has continued through the first half of this year, FTI notes. The sector could see a ripple effect as the promotional strategies of certain large chains are picked up by their lower-end and mid-market counterparts. Additionally, “the ambitious turnaround efforts of several struggling chains could impact this season's sales and margins for the entire middle market sector,” according to FTI.

FTI's positive take squares with Commerce Department figures released Wednesday, showing that US retail sales last month reached $428.1 billion, an increase of 0.4% from the previous month and 3.9% Y-O-Y. Total sales for the August through October 2013 period were similarly up 3.9% from the same period a year ago.

“Consumers appear to be willing to spend beyond what the tepid job creation and minimal income growth over the past several quarters would suggest,” observes Lindsey M. Piegza, chief economist with Sterne Agee. “In part, consumers are feeling wealthier thanks to record gains in equities coupled with falling prices at the pump and a slew of better-than-expected data reports which at least on the headline suggest things are improving.”

Although “sustained job creation and bigger income checks” will be needed to sustain the pace of growth, Piegza says short-term optimism may give holiday sales a boost. Bloomberg said Wednesday that a median forecast of economists surveyed this month predicted that household spending would grow at a 2.1% annualized rate in the last three months of the year. The prior quarter's expansion of 1.5% was the weakest performance in two years, according to Bloomberg.