While some consumers have already begun stocking up on party supplies and gifts from their favorite retailer for the upcoming holiday season, many investors are giving some thought to stocking up on the retailers themselves.
Two powerful forces – one external and one internal – are coming together to possibly make this gifting season very giving indeed… to shareholders.
External Force: More Shopping Money
The multi-month plunge in crude oil and, by consequence, in gasoline prices have lowered consumers’ fuel expenses by some 19% already, as one gallon of gasoline currently averages some $2.99, down from an average $3.70 in June.
How much of a savings does that amount to nationwide? According to the Frequently Asked Questions section at the U.S. Energy Information Administration’s website, “In 2013, about 134.51 billion gallons of gasoline were consumed in the United States, a daily average of about 368.51 million gallons.”
Ignoring the overall increase in consumption this year over last, at that same rate of consumption consumers are currently saving some 71 cents per gallon, multiplied by 368.51 million gallons daily, for a total savings of some $261.64 million per day.
Multiplying that figure by 5 months since June (150 days), and then dividing by two to get the average (remember that the 71-cent decline is the total decline over the last 5 months, so dividing it by two gives a very “crude” average), means that Americans have already saved some $19.6 billion.
Of course, if prices remain this low until the end of December (45 more days at the full 71 cents savings), consumers would have an additional $11.77 billion to spend, raising the total to over $30 billion.
But the savings are not simply going to stop right at the stroke of midnight on New Year’s Eve, as low crude oil and gasoline prices are expected to stick around well into 2015 thanks to a higher U.S. dollar which was made strong by the removal of the U.S. central bank’s monetary stimulus program, and is being kept strong by weakening foreign currencies amidst outpourings of stimuli in other parts of the world.
Thus, each additional month with fuel prices this low adds another $7.85 billion into the economy through increased consumer spending. Let’s face it, if people have the extra cash laying around, it won’t stay laying around for long. They’ll spend it.
IHS Global Insight economist Chris Christopher noted that “tumbling gas prices are very supportive of increased consumer spending,” adding that he expects this year’s shopping activity to increase by 4.2% over 2013’s holiday shopping.
But the boost to retailers has already begun, even before the holiday shopping season has officially commenced. The International Council of Shopping Centers recently revealed that “chain-store sales jumped 0.6% [in October], reversing September’s decline”.
This is prompting retailers to unleash a force of their own to boost sales even more.
Internal Force: More Shopping Time
Retailers are very well aware that there are a few extra dozen billion dollars floating around the economy waiting for a place to land. And they want to make sure they get more of it. How?
Since there is only so much volume of shoppers a store can handle, the only way to get their hands on more consumer dollars is to give shoppers more time in which to spend them.
The nation’s largest retailer Wal-Mart (NYSE: WMT) just announced it will replicate the huge bonanza of “Black Friday” – the next day after Thanksgiving Thursday, which is generally considered the holiday shopping season’s opening day – by stamping it out again and again.
Last year retailers had already bumped up Black Friday to Thursday by opening the night of Thanksgiving. This year they intend on stretching their ultra-low storewide sales throughout Thanksgiving weekend and into the beginning of December.
“The world’s biggest retailer instead will offer its best deals on television sets, toys and other gifts over a five-day period beginning in the last week of November into early December,” informs the Wall Street Journal.
Wal-Mart U.S. chief merchant Duncan Mac Naughton explains that the trend of night shopping has been catching on over the past several years, with shoppers finding those late shopping hours more convenient, finding and getting what they want more quickly and with less hassel.
Other retailers are losing no time announcing similar increases to their holiday shopping hours. Best Buy (NYSE: BBY) is offering its first sale of this season on Thanksgiving Thursday, while Target (NYSE: TGT) is not only planning a presale on the Wednesday before Thanksgiving, but has already begun discounting certain items this current week. Amazon, for its part, has shown itself up to the challenge and has upped the anti even further, offering discounts the entire month of November.
Mac Naughton joked, “It used to be called Black Friday, then it became Thursday, now it’s a week long. Maybe we should just call it November.”
What Do Analysts Expect?
Even with more consumer money being spent and more time in which to spend it, analysts are not convinced all retailers will fare equally well. In fact, earnings growth projections for the current and next quarters (Q4-2014 and Q1-2015, which are generally reported in January-February and April-May for the most part), are anticipated to be rather mixed for the discount retailers, ranging from robust to just plain bust:
Current Quarter Next Quarter
• Best Buy: +33.3% +5.6%
• Wal-Mart: -1.8% -1.9%
• Target: -14.3% +35.6%
• Amazon: -68.6% -17.4%
Plotting these discount retailers on a graph since the economic recovery began in March of 2009 shows how the only one to consistently beat the S&P broader market (black) has been Amazon (orange). Irony of ironies, given how Amazon is expected to post substantial earnings shrinkage versus last year’s holiday period.
What’s up with Amazon? Analysts suspect growing competition not just from the gorilla in the room Alibaba (NYSE: BABA), but also from other retailers spearheading online holiday sales campaigns of their own.
Apart from the discount retailers, however, investors may find better opportunities in the department stores, though here too we must be selective. The anticipated earnings growth during the current and next quarters for the six largest U.S. department stores are as follows:
Current Quarter Next Quarter
• JC Penny (NYSE: JCP) +56.8% +117.1%
• Dillard’s (NYSE: DDS) +10.6% +43.4%
• TJX (NYSE: TJX) +13.3% +14.8%
• Macy’s (NYSE: M) +6.4% +10.0%
• Khol’s (NYSE: KSS) -8.6% +4.5%
• Sears Holdings (NASDAQ: SHLD) -12.2% -139.8%
Plotting these department stores on a graph since the economic recovery began shows a slightly better picture with three of them consistently beating the broader market: namely Dillard’s (blue), Macy’s (orange) and TJX (purple).
Although JC Penny has had a major fall-out along the way which put it at the bottom of the pack (beige), analysts now believe new management has begun turning the ship around.
So while everyone else is off spending their money buying up all the items that the retailers stock, investors might find better bargains buying up the retailers’ other stocks. After all, why be a shopper of a store when you can be an owner?