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Black Cloud Over Start to Holiday Season?

By Brian Sozzi, Equity Research Analyst

The holiday season is no longer made or broken on one day (Black Friday) or a series of days (Black Friday weekend) at brick and mortar stores.  Retailers, sensing that holiday 2010 would not be a repeat of holiday 2007 (strong), but also not holiday 2009 (weak sales), pulled out almost all of the stops to lure in consumers.  Pre-Black Friday promotions began in the first week of November for many, and definitely by November 22 for the rest.  Flagship stores and mall-based stores bucked tradition and opened on Thanksgiving and earlier than the norm on Black Friday.  The consumer responded to these actions by retailers due in large part to the compelling promotions being offered on items such as toys, small household appliances, and digital cameras.  According to research firm Shoppertrak, sales increased a solid 6.1% and 6.2% in weeks one and two of November, respectively.

That said, what consumers seemed to not respond to was a tactic by retailers, a testing of the spending waters if you will, to scale down promotions dramatically later in the day on Black Friday and even more so on Black Friday weekend.  With the promotions off the table at many specialty apparel chains, and not as pronounced at department stores, it left retailers showing higher ticket prices on embellished sweaters to merino sweaters to basics.  Promotions continued at electronics stores throughout Black Friday and the weekend (especially at the electronics section at Costco), but overall there was a pause in spending to round out the official start to the holiday shopping season.  Pauses have become synonymous during the consumer spending recovery of 2010, such as in the back to school season, where purchases were done when great deals were to be had.

I had the pleasure of doing a live hit for CNBC from Roosevelt Field Mall on Long Island.  As a point of reference, Long Island has an unemployment rate of 6.9%, below the national average, and almost half that of Michigan.  So to say that traffic and bag count trends at this particular mall were indicative of nationwide trends is somewhat of a stretch.  However, I liked what I saw at the mall during my nine hour marathon session.

Black Friday Observations (Roosevelt Field Mall)

* Typical traffic pop at the opening of the mall (5am), but consistent stream well into the afternoon.  Holiday 2009 this was not.
* Strong bag counts throughout the day even as promotions were curtailed around noon time.
* A combination of buying promoted key items (hoodies, denim) and impulse buys (fashion tops, accessories).
* Inventory levels quite hearty.

After spending nine hours at Roosevelt Field Mall, it was off to two C rated malls, Massapequa Mall and South Shore Mall.  Once again, traffic was strong in the late afternoon and it was obvious that unlike holiday 2009, people were there to buy rather than to browse and take notes ahead of a return to the malls in the week before Christmas.  Then it was home, fifth coffee in hand, to read the accounts of the day nationwide and touch base with industry contacts.  There was no absence of excitement as to how the holiday season began.  I was surprised at the strong traffic in the higher unemployment states, and the willingness of consumers to (1) buy big ticket items (yes electronics outside of anything donning the Apple moniker and 3D TVs are deflationary, but spending $1000 on a LCD is still a big ticket purchase); and (2) put things on layaway, underscoring the improved sentiment amongst consumers (jobs are not going anywhere in a month or two, for example, as opposed to 2008 and 2009 when tomorrow brought endless possibilities).

Considering everything I digested from my readings and laid eyes on (such as ATMs running out of cash), including the early payment volume number by PayPal, I was on the surprised side to learn on Saturday evening that Black Friday traffic was up 2.2% while sales were up a meager 0.3%, on top of a 0.5% increase a year earlier, according to Shoppertrak.  Maybe the muted sales number is indicative of the items people bought or sales being pulled forward into November and onto online, but the Shoppertrak print may leave some investors in retail equities concerned on the potential for disappointment in the 4Q financials for the sector.  At the very least, it may spark confusion on the part of investors as to the next move (buy more shares or dump) given the more optimistic data points from the National Retail Federation on Sunday afternoon (these data points are more in keeping with our observations). 

To all of this, I would say let's not write the holiday season off just yet or become overly bullish.  High expectations are built into the associated equities, and if the data is conflicting, a sell-off could open up opportunities. 

When viewing in a more expansive light, I believe the holiday season has started on plan for the majority of retailers, perhaps a bit stronger than expected.  First, strong sales were evidenced at the beginning of November when promos were not as attention grabbing as those early Black Friday.  To me this demonstrates a consumer that is value focused yes, but open to buying for oneself and putting away an additional gift in the basket for a family member or friend.  Second, online sales were strong as well, with traffic and transaction value improved year over according to research firm Coremetrics.

The holiday season is simply no longer Black Friday or bust.  It's really becoming Black November, where reasonable discounts are articulated to the consumer prior to Black Friday online and in stores.  Longer hours of operation is also an ingredient to Black November.  Remember, retailers bought inventory for an entire season (November to January) not just Black Friday.  While I would have liked to see a meatier Black Friday sales number from Shoppertrak to confirm what I saw and the numbers from NRF, I think strength online and in early November suggest the consumer has his or her wallet open, and will spend if enticed by a 30% discount on a new sweater or the latest gadget from Apple.  In 2009 and 2008, the discounts needed were 50% plus to get the consumer to buy the sweater, or the purchase wasn't made at all.

Data Points

* Black Friday online sales up 16%.
* Average order size up 12% online on Black Friday.
* Online spending higher by 33% on Thanksgiving.
* Online jewelry sales up 17.6%.

* Black Friday store traffic up 2.2%.
* Sales up 0.3%.

National Retail Federation
* Black Friday weekend traffic up 8.7%.
* Average spent per person up 6.4%.

Black Friday Weekend Observations

* Malls crowded (notably on Saturday), but filled with browsers and deal hunters.
* Retailers held the line on promotions, pretty much keeping them consistent to Black Friday afternoon (this is quite the game as inventories are higher than last year).
* Stores filled with inventory, out of stocks just not in the cards outside of heavily promoted TV deals.

Stores that were Visited by Friendly Elves or the Ugly Grinch

There were identifiable winners and losers on Black Friday and the ensuing weekend.  The winners had strong promotions and compelling merchandise, while the losers missed the boat entirely.

Santa's Elves Came To...

* Gap (GPS): Ran some of the best promotions in the mall for publicly traded specialty apparel retailers.  The Gap division offered 50% off the entire store up until 11 am, 40% off at Banana Republic, and terrific deals at Old Navy on key items such as hoodies and t-shirts.  After the promotions ended on Black Friday, the Gap division went rather non-promotional into Sunday, same for Banana Republic.  Gap's overall Black Friday traffic was robust, and I was pleased by the inventory content for men and women.  Gap continues to be one of the more targeted retailers with respect to promotions this holiday season.

* Hollister and Abercrombie & Fitch (ANF): 30% off at Hollister and a spend $100 get a $50 gift card at Abercrombie & Fitch (up until noon) ignited frantic traffic on Black Friday.  I personally had flashbacks to 2006/2007, watching lines extend out into the mall at both divisions.  Both divisions had nice presentations in coats, denim, and fashion tops (specifically for girls).

* American Eagle Outfitters (AEO): Promoted hoodies and denim, but I think consumers responded to the strong value being offered in fashion.  The stores looked the best we have seen them in some time presentation wise.

* Juicy Couture (division of Liz Claiborne): Expensive track suits and pants must have been on the wish lists of teenagers as Black Friday traffic was strong, catching us off guard given the sluggish comp trend at the division in 2010.

* Pacific Sunwear (PSUN): Started the holiday quarter on a gloomy note (-10% comp), but we were pleased to see strong traffic and bag count on Black Friday.

* Ann Taylor (ANN): Maintained its promotional cadence throughout Black Friday weekend at Loft and Ann Taylor, counter to what happened elsewhere in the mall. Likely share gainer.

* Aeropostale (ARO): Ran a 50% to 75% off the entire store promotion throughout the weekend at Aeropostale, P.S. from Aeropostale, and online.  I received reports that Aeropostale stores were opening up earlier than other competitors in the mall in some states, and lines were strong.  Additionally, the NY flagship store in Times Square was open on Thanksgiving, as was American Eagle's down the block.

* Urban Outfitters (URBN): By far, had the most significant amount of traffic in the mall on Black Friday morning amongst specialty apparel retailers.  That indicates to me that management has gotten a handle on the shift in fashion that has been mentioned on the last two earnings calls.

Grinch Arrivals

* Bebe (BEBE) and Hot Topic (HOTT): Tumbleweeds could be seen blowing through these two stores on Black Friday and into the weekend.  Both stores lacked the traffic grabbing promotions on the windows or on other signage, and the inventory content was weak.  At Bebe, it was one of the least promotional on Black Friday morning, and sub par traffic resulted.  Come Saturday afternoon the stores were running a 40% off the store sale, a sign that Black Friday was disappointing.  For Hot Topic, its promotions were not powerful enough and with ambitious 4Q comp guidance, I wonder if a bad November will lead to a revising of the ranges conveyed to investors.

* Furniture stores: If pushed to decide on an iPad for each kid or a new bedroom set, heads of household likely chose the former.  Our tours of La-Z-Boy Furniture Galleries and Thomasville locations (division of Furniture Brands) on the weekend left us dissapointed, and in agreement with the cautious tones on recent conference calls from each.


By me neglecting to mention Target (TGT) and Wal-Mart (WMT) it does not mean impeding doom for each for the fourth quarter.  I think each company had a good Black Friday and overall November.  Target more so than Wal-Mart given its marketing initiatives and properly constructed inventory content.

Brian Sozzi
Wall Street Strategies

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