If you are the sort of person who tracks stories on retailers’ holiday sales performance you know a certain ebullience has set in. On the heels of optimistic forecasts by the National Retail Federation and others, Mastercard’s SpendingPulse indicates that retail had the “best” season in six years, with overall sales growing 5.1%. Online shopping alone was up over 19%. So there should be joy throughout the land right? Well, not so fast. Before we declare victory a few things must be kept in mind.
The holiday season isn’t quite over. Mastercard’s survey covers the period between November 1 and December 24. That just simply isn’t the whole picture. For one thing, the week after Christmas is a huge week for retailers. And it is the final week of the year and the beginning of January when most holiday gift cards get redeemed. Similarly a big percentage of holiday returns and exchanges get done during this time. Until this all nets out we simply lack the complete picture.
Your mileage may vary. We should all know the flaw with averages, and when it comes to dissecting retail success the industry is no different. The Mastercard data reveals a wide distribution of outcomes at the category level. Leading the way was apparel, which was up 7.9%, and home improvement, up a whopping 9%. Alas department stores got another lump of coal in their stocking, continuing their string of declines. Electronics and appliances also saw sales drop.
A tale of two cities. While I generally avoid making specific predictions I often get asked to weigh in on anticipated “winners & losers” of the holiday season and my typical, albeit more than a little smart-alecky, answer is always the same: the same brands that have been winning and losing all year. It turns out that retailers that have remarkable and relevant business models going into the season continue to do well. Those that have boring value propositions (or are executing poorly) continue to struggle. So the notion that a strong tide will cause all ships to rise sounds true, but often isn’t. When the dust settles and we dissect the numbers it’s pretty likely that the collapse of the middle will be even more evident.
Yeah, but what about profits? The only thing we know anything about are sales numbers. I hate to break it to you but it is possible to drive sales growth without actually making money. Ask Wayfair. Again, mileage will vary considerably here–and we won’t have more useful information until retailers report their quarterly numbers. Yet a few things should give us pause. First, a few studies–and my own anecdotal experience–suggest the rate of discounting was quite high. Until we see how gross margins come in we won’t know how bright the season was or wasn’t. Second, the continuing shift to e-commerce generally isn’t accretive to margins for most retailers–particularly given the higher rate of returns and growing fulfillment costs. Third, there is a fair amount of expense creep, be that from rising wages, the tariff nonsense or handling the huge jump in BOPIS orders. My best guess is overall retail profits will grow more slowly than overall revenues.
Storm clouds on the horizon? Even if most retailers post a strong fourth quarter there are reasons to temper expectations as we begin 2019. While the most recent stock market gyrations may owe more to the chaotic American political climate, retail investors are definitely tapping their brakes. Moreover, consumer confidence is beginning to wane. And if the partial US government shut down goes on much longer it’s hard to imagine that won’t have a material dampening effect.
So at the risk of being a bit Clinton-esque, to call it the best holiday season, we really have to define what “best” is. We also need to be a bit more patient.
A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.
The week of January 13th I’ll be in NYC attending the NRF “Big Show” and participating in various related events, including a special “fireside chat”. On January 24th I’ll be keynoting the ICSC Nexus Conference. In February I’m headed down under.