We’re Reaching Peak Christmas and Retail Investors Are Jittery

(Bloomberg) -- The bull case for a monster U.S. holiday-shopping season is overwhelming: Consumer confidence is sky high. Median wages are on the rise. Households are wealthier than a year ago thanks to continued gains in the stock market and home values.

All this has led to a variety of researchers and trade groups calling for retail sales in stores and online to grow by about 5 percent—or more. That could make it the best Christmas shopping season in recent memory, likely topping last year’s robust growth and mirroring the frenzy of the mid aughts when home-equity loans fueled a spending binge, according to Ken Perkins, president of researcher Retail Metrics.

“Those factors set up for the consumer to spend,” Perkins says. “This is as good as it’s been for a while.”

The question is whether this is as good at it gets, whether the 2018 holiday shopping season will mark the end of a relatively benign period for American retailers—Peak Christmas, if you will. Expectations have risen to levels that some chains could struggle to hit, according to Gabriella Santaniello, founder of retail consulting firm A Line Partners. Look no further than Walmart Inc. and Macy’s Inc., which rocketed past analysts’ forecasts in earnings reports this week and saw their shares slump.

All the good news has already been absorbed by the market. Gains in retail stocks have doubled the broader market this year, lifted by improving results and the assumption that consumer confidence and wage gains will deliver a standout holiday. Investors also got over their fear that Amazon.com Inc. was going to destroy the entire retail industry. But now, with Black Friday looming, investors seem to be questioning whether they've gotten too optimistic.

“It will be strong, but by no means is everyone going to outperform,” Santaniello says of the holiday season. “Expectations are set up for many of these retailers to fail.”

We’re Reaching Peak Christmas and Retail Investors Are Jittery

Over the past quarter century, the U.S. retail industry can be broken into three periods. There was the rapid growth of stores and retail brands starting in the 1990s. Then came the recession and the onslaught of e-commerce, for which the industry was dangerously unprepared. More recently, the market entered a third phase best summed up as stabilization.

Strong retailers, like Best Buy Co., Walmart Inc. and Home Depot Inc., have made strides by investing in technology and logistics. And they have more freedom to do so, thanks to the huge savings from the corporate tax cuts that went into effect this year. Their e-commerce and delivery operations have closed a lot of the gap with Amazon, and they are much smarter about using stores as an advantage to make delivery faster, convenient and cheaper. In a nod to the value of stores, Amazon bought grocer Whole Foods last year and continues to open locations under its own name.

But they’re outliers. Even with the cash infusion from the tax cuts, many retailers are still struggling to evolve, according to Santaniello. She cites companies like Gap Inc. and L Brands Inc., owner of Victoria’s Secret. Their pock marks have been somewhat smoothed over by the recovery from the recession. But they look worse now that some legacy chains like Best Buy have turned the corner, she says.

And this holiday season, “the division will look much wider,” Santaniello says.

Amazon is hardly the only competition on the digital front. Feisty new online brands like Warby Parker and Casper are popping up every year and making a concerted push into brick and mortar.  Upstarts like these have already opened more than 600 stores and are expected to step up the pace, according to researcher Green Street Advisors. Even worse for established chains: Many of these firms use fun experiences and strong customer service to stand out at the mall.

“Retail has been boring for a long time,” Santaniello says. "Shoppers want something new.”

This Christmasseason might also be the last hurrah of this economic cycle, leaving a dangerous future for chains that are just hanging on. Many retailers, like J.C. Penney Co. and Neiman Marcus Group Ltd., are still sitting on loads of unsustainable debt that is expensive to maintain and diverts spending from much-needed upgrades to supply chains and e-commerce. Years of low interest rates helped many retailers stave off a reckoning, but re-financing will become much more difficult as credit tightens. This year alone Toys “R” Us Inc. and department-store chain Bon-Ton Stores Inc. drowned in red ink and liquidated. Sears Holdings Corp. is currently in bankruptcy court and struggling to secure enough financing to attempt a turnaround. 

J.C. Penney lowered its forecast for the year on Thursday, pledging to unload inventory so it can make a turnaround plan work. That won the company a reprieve from investors, but the stock is still down 59 percent this year. Dillard’s Inc., another department store struggling to give shoppers a reason to come to the mall, slid as much as 18 percent after a underwhelming earnings report.

The woes of those chains leave billions of market share up for grabs, which has only further goosed investor expectations for this holiday season.

"If you can’t perform in this environment, I don’t know what you are going to do when there is a downturn,” Perkins says. “The tide is high right now, and when it pulls back out it’s definitely going to expose some retailers who are pretenders.”

©2018 Bloomberg L.P.