Good tidings for holiday spending Good tidings for holiday spending\images\insights\article\christmas-store-window-small.jpg December 22 2021 December 22 2021

Good tidings for holiday spending

Season is bright for retailers, despite headwinds.

Published December 22 2021
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On the heels of a very strong Back-to-School (BTS) season that saw retail sales leap by 16% year-over-year (y/y), the first half of this year’s holiday shopping season was even stronger, with retail sales rising by 17.2% y/y in October and November combined. What’s driving this merry Christmas for consumers? The labor market has improved and wages have risen sharply, along with a powerful wealth effect that has seen stocks register 67 record closes on their way to a 25% rally this calendar year.

But all is not eggnog and freshly baked Christmas cookies this holiday season. True, Christmas tree sales were strong – typically a positive sign for holiday spending – but inventory levels for many retailers were impacted by supply-chain bottlenecks and the West Coast port logjams. In addition, inflation has surged to 30-year highs, consumer confidence has fallen, and the savings rate has normalized to 7.3% in October from stratospheric levels. 

While the consumer will likely end this holiday season on a high note when they redeem their gift cards in January, we may very well see a more chastened, price-conscious shopper in 2022.

November softer than expected Nominal retail sales in November rose by a weaker-than-expected 0.3% on a month-over-month (m/m) basis, versus a more robust 0.8% expected gain and an upwardly revised 1.8% increase in October. “Control” results (which strip out autos, gasoline, building materials and food service, and feed directly into the quarterly GDP report) declined by a much weaker-than-expected 0.1% m/m in November (0.7% gain expected), with October revised up to a 1.8% increase.    

The dual fears of potentially contracting Covid from packed malls and facing depleted holiday inventories drove shoppers to pull forward a significant amount of holiday sales from November into October. Department stores (down 5.4% m/m), electronics (down 4.6%) and flat e-commerce results were November’s lowlights. 

But November 2020 results were sequentially lower by 1.4%, making for a very easy y/y comparison. Despite November 2021’s tepid 0.3% nominal m/m gain, that translated into a strong 18.1% y/y surge. Looking ahead, December 2020 was also weak, posting a 1.0% m/m decline. But gift card season in January 2021 was very strong – perhaps reflecting shoppers’ very real fear of contracting Covid at that time – sparking a 9.4% m/m surge. 

We’re expecting a great Christmas Deloitte is forecasting a relatively solid 7- 9% overall increase in Christmas sales in 2021, compared with a range of 2.7% to 5.3% for the October-through-January periods over the previous four holiday seasons. Deloitte also expects e-commerce sales to rise by 11-15% in 2021, compared with a much stronger 34.8% gain in 2020. Meanwhile, the National Retail Federation (NRF) recently raised its forecast for holiday sales in November and December 2021 to a gain of 11.5% (up from a range of 8.5% to 10.5%), versus 8.2% in 2020 and an average increase of 4.4% over the past five years.

Back-to-School sales bode well for holiday spending Christmas historically tends to be 80-90% positively correlated with BTS results, excluding any weather-related issues. In 2021, BTS spending soared by 16% y/y, compared with a 3.4% gain in 2020.

We include January in our analysis of Christmas sales, because of post-holiday gift-card redemptions. Gift cards only count as a retail sale when they’re redeemed, not when they’re purchased. About 15% of gift cards are typically redeemed the week after Christmas, and 60-65% are usually redeemed during the first half of January, so gift-card redemptions will determine the overall strength or weakness of the holiday season. 

Strengthening labor market November’s household survey surged by more than 1.1 million jobs, and the unemployment and labor impairment rates plunged to cycle lows of 4.2% and 7.8%, respectively. The participation rate finally rose to 61.8%, and average hourly earnings have risen at an annualized rate of 5.6% over the past eight months. The rate of unemployment for less-skilled workers plummeted from 7.4% in October to 5.7% in November, compared to a modest one-tick decline to 2.3% for well-educated workers. The JOLTS report lists 11 million open jobs in October, the ADP private payroll survey has added an average of 543,000 jobs over the past three months, and initial weekly jobless claims recently fell to a cycle low of 188,000 (down 97% from their April 2020 peak).

Strong wealth effect in play Our research friends at Evercore ISI note that over the past 22 years, there has been a 78% correlation between the S&P 500’s fourth-quarter performance and holiday sales. While the S&P 500 is up about 8% so far in the fourth quarter on a total-return basis, it has risen by 25% so far this year, and it has surged by 114% from the pandemic trough in March 2020. We believe that a collective recovery in stock prices will help drive Christmas sales well above the NRF’s forecast.

Robust Christmas tree sales Since 2003, Evercore ISI has been gathering data from 24 regional Christmas tree associations, farmers and retailers in the U.S. and Canada during each of the four or five weeks between Thanksgiving and Christmas, to gauge the relative strength or weakness of the sale of Christmas trees, wreaths and garland. If consumer confidence is high and the economy is strong, then people usually spend more money on their holiday decorations, in addition to their gifts, food and beverages, and travel. With the season now complete, ISI’s annual Christmas tree unit sales survey has posted a 9% y/y sales gain – despite higher prices due to sharply rising inflation and higher shipping costs – the fourth best over the 18 years of its survey.

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Tags Markets/Economy . Equity .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

The Job Openings and Labor Turnover Survey (JOLTS) is conducted monthly by the U.S. Bureau of Labor Statistics.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

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