December Sales Will Warm Merchants' Hearts

December Retail Sales Report
December Retail Sales Report

Retail appears to have gotten back to business as usual this past holiday season. Shoppers didn't disappoint merchants, buying presents at both low- and high-end prices, from jewelry and electronics to clothes and shoes. Most analysts are predicting sales will show year-over-year increases of 3% to 4% on Thursday, when major merchants post December figures and holiday totals.

"It was really a broad-based strength we saw in December," says Mike Berry, director of industry research for MasterCard (MA) SpendingPulse.

Nearly every retail sector posted increases, from essentials such as food and auto repairs to luxury goods and jewelry, according to SpendingPulse, which tallies up sales according to payment form, such as credit cards or cash. Some sectors that posted lower numbers, such as department stores and electronics retailers, were affected more by pricing pressures than low traffic, Berry notes.

"They're Still Buying"

Apparel, considered a gauge of discretionary spending, was up 10.9% in December, jewelry was up 10.4% and luxury goods sales rose 8.5%, according to SpendingPulse. Among the underperforming segments, department store sales were down 2.5%, while electronic retailers were up only 1.2%, despite moving a lot of inventory.

"Shoppers are out there, they're still buying electronics and such, and they're buying more," says Berry. But he notes low prices hurt both electronics and department stores. Electronics retailers had strong traffic and unit sales, but those factors were offset by lower prices for big-ticket items such as TVs and laptops. Department stores' sales totals dropped due to store closings during the year, as well as falling prices.

"They had to do a little bit of discounting to keep traffic coming in," Berry says.

Retailers laid out a wide assortment of promotions and offers to lure shoppers in this holiday season, and experts agree the shoppers responded, despite continuing worries about the slow pace of the economic recovery and continuing weakness in housing and job markets. However, observers point out the discounting was more measured and better organized than it was in 2008, when the onset of recession caught retailers overstocked for the holidays and forced them into fire-sale pricing to clear excess inventory.

"A Few Upside Surprises"

The heavy promotional activity spurred traffic this year, but there appeared to be less need for post-holiday discounts, which has eased concerns about profits, noted Michael Exstein, retail analyst at Credit Suisse First Boston (CS), in a note to investors. However, Exstein warns that inventory growth during the fourth quarter was beating sales growth for the first time since 2008, which -- coupled with the aggressive promotions -- could slow down profit growth.

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"Overall, we think December should be in line with expectations with a few upside surprises given all of the positive news that has surrounded the holiday shopping season," Extein wrote. "The key to better understanding the overall 'health of the consumer' will be when Walmart reports its sales for the fourth quarter in February." Walmart (WMT), the world's largest retailer, doesn't report monthly sales figures publicly.

"In the end, December will prove to be a relatively healthy sales month for retailers," says Michael Niemira, chief economist of the International Council of Shopping Centers. He's expecting a sales increase of about 3.5% or higher.

Despite snowstorms along the East Coast on the weekend after Christmas, warmer temperatures afterward helped merchants make up lost ground on post-holiday sales, Niemira noted in a report. Sales for the week ending Jan. 1 rose 3.6% above the same week in 2009, and 0.4% above the week of Christmas, which itself saw sales 4.8% higher than the year-ago period.

There could be some spillover effect into the following months. A survey by the ICSC found that gift card sales this holiday season reached their highest level since 2007. But the rate at which shoppers redeemed them after Christmas was down from last year -- 10.8% of value, versus 20.9% in 2009. And the number of shoppers planning to redeem cards in January was lower than in the past two holiday seasons. That leaves room to shift more of the sales associated with these cards to the first quarter of 2011, perhaps keeping some of that holiday momentum going.

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