Morgan Stanley makes a troubling prediction: the upcoming holiday shopping season will be the worst since 2008.
In a new report — titled "Expect Coal: We Predict the Weakest Holiday Since 2008" — Morgan Stanley analysts Kimberly Greenberger, Scott Devitt, Ellen Zentner, and Jay Sole explain their forecast for a meager 1.6% increase in same-store sales at softline retailers in the fourth quarter.
"We believe an uncertain U.S. macroeconomic backdrop, unfavorable calendar shifts, continued big ticket item strength (autos, appliances, home improvement) and increased promotional activity likely inhibits 2013 Holiday sales as well as overall near-term retail sales growth," writes the Morgan Stanley team. "Our bottom-up analysis (the sales weighted average of our individual company estimates) implies a +1.6% increase in Holiday comp store sales, [1.9 percentage points] below last year’s +3.5% gain, both excluding [J.C. Penney]."
In the report, the analysts paint a grim picture of the American consumer:
We have a cautious outlook on the 2013 Holiday season for three reasons: 1) We continue to believe consumer confidence is unlikely to rebound anytime soon, 2) We expect weak mall traffic likely continues through November/December, and 3) We predict the most intense promotional Holiday environment since 2008. We look to selectively buy our favorite retail stocks and prefer those companies with revenue upside or potential for positive margin surprise (KORS, LTD & ROST).
Four negative data points imply unfavorable consumer spending inclinations: 1) The National Retail Federation (NRF) forecasts the average Holiday shopper will spend $737.95 on gifts, de“cor, and greeting cards this year, 2% less than last year; 2) 51% of those people polled said economic concerns would affect their holiday spending plans and 79.5% said they plan to spend less overall during the Holiday; 3) On October 17th, Bloomberg’s monthly consumer expectations gauge indicated the percent of respondents saying the economy is going to get worse showed the biggest surge since October 2008; and 4) The NRF forecasts Halloween spending per person dropped 6% this year. The only other time the NRF forecasted a Halloween spending decline was 2009.
Although the NRF projects +3.9% total Holiday sales growth, the increase is a result of more shoppers participating in Holiday shopping this year vs. LY. On a per person basis, total gift spending (ex. greeting cards, decorations) is expected to decrease -2.5% to $536.85, the first forecasted decline since 2008/2009 (Exhibit 2).
The report also points to a shift in spending toward "big-ticket items" like cars, home improvements, and appliances.
"Big ticket leading indicators such as the Association of Home Appliance Manufacturers 'AHAM 6' which measures domestic shipments of six major big-ticket appliances (washers & dryers, dishwashers, refrigerators, freezers, ovens, and ranges), continues to show staggering trends (Exhibit 7)," write the Morgan Stanley analysts.
"Although big-ticket items are likely less of a headwind in 2014, we expect a shift in discretionary spending towards durables to continue to squeeze apparel sales in FY14."
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