September Comps: Some Signs of Strength

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September sales were stronger than expected, leaving some analysts to wonder aloud if everyone has been overly pessimistic. As we close the  look on back-to-school (BTS) 2011, we are encouraged by September's performance. Nevertheless, retailers would be wise to keep their eyes on issues that may cause trouble for the retail community as the holiday period promises quite a battle to salvage what started as a promising year for retailers. Let's examine each of the issues and explore how these might impact various retail sectors:

• Holiday Spending: Consumer research shows serious belt tightening on holiday spending

• BTS Peformance: BTS results create inventory risks

• Over-ordering for Holiday Spending: Early indications from July likely resulted in over-ordering for holiday given today's consumer confidence, and thus an acceleration of mark-down activities

HOLIDAY SPENDING: In the past two months, consumer confidence appears to have begun to level off.

A recent New York Times article reported that a number of leading retailers intend to grow seasonal hiring amid expectations of 2-3% seasonal sales growth. Yet, a deeper dive into consumer expectations shows a very troubled shopper.

The recent AlixPartners U.S. Economic Outlook Survey* found that:

• Americans' outlook on the economy continues to deteriorate – 69% feel "not good" or "bad" about the direction of the economy (compared to 63% in May 2011 and 59% in September 2010)
• The level of concern about family economic situation rising: 40% are Extremely or Very Concerned vs. 33% in May 2011
• Only 20% see improvement in their personal financial situation over the next 12 months, down from 27% in May 2011
• 89% don't see a recovery until 2013, if ever

43% of Americans Feel Worse About Their Personal Economic Situation
Than They Did a Year Ago (vs. 35% in May 2011)

Source: Publically available data and AlixPartners analysis

 
Even more relevant to the retail community are consumers' reported Holiday 2011 spending expectations. The picture is not pretty:

• 88% say they plan to spend the same or less than last year on holiday gifts, with 41% planning to spend less (compared to 31% who said so in 2010).

• Nearly one in three consumers plan to spend $250 or less on gifts this year, compared to 24% who said so in 2010.

• Biggest consumer concern this year? Their own personal economic situation—cited by 57% of those planning to spend less.

BTS PERFORMANCE: We warned, in our early-August viewpoint on July comps, that a positive July is not a good indicator of a strong back-to-school (BTS) season for retailers. For nearly 40% of retailers, July turned out to be a false positive.

OVER-ORDERING FOR HOLIDAY: For almost 40% of retailers, BTS 2011 comps declined, and that could spell double trouble. First, higher than expected inventories exiting the BTS season, and second, holiday order volumes likely placed based on strong July comps and an optimistic view for future consumer buying.

We tested this theory by creating an index of inventory divided by prior quarter revenue dollars and normalized for store count. The data show pre-BTS 2011 inventories were higher than those going into the 2010 BTS period for discount stores, specialty stores, and mass merchandisers. Dept stores have generally cut inventory. On average, retailers entered the 2011 BTS season with 2% more inventory per store than the prior year. Starting in a higher position followed by a lower-thanexpected 2011 BTS spells inventory concerns for many retailers entering the holiday season.

Source: Publically available data and AlixPartners analysis

And this isn't the only inventory issue retailers face. The bigger concern is how retailers planned their Holiday orders. Typically, late-July/early-August is the latest the holiday orders can be adjusted. Because same-store sales looked very solid in July for two-thirds of retailers, we expect that holiday order placements were aggressive.

These three potential problem areas may combine to drive retailers to discount aggressively to move what could very well be excess inventory entering the holiday season. In that case, the outlook for consumers could be very promising. They expect to spend 15% less this holiday season, but they may still be able to fill the same amount of space under the tree.

IMPLICATIONS FOR Q4: With retailers focused on comp sales performance, three questions come to mind: (1) How much will margin suffer? (2) Who will successfully generate foot traffic? and (3), Who is positioned from a store operations perspective to convert that foot traffic to revenue?

For those that focus on traditional advertising and across the board price cuts to drive traffic, the outlook for Q4 margins could be troubling. However, 2011 brings a plethora of newer consumer targeting approaches that retailers are pursuing to attract and retain consumers, such as:

• Social media and viral marketing – Facebook / Twitter / YouTube

• Loyalty programs

• In-store coupons redeemable on next purchase

• In-store experience (shoppertainment)

• Supporting social movements that resonate with their consumer base (zero carbon footprint, sustainable and ethical manufacturing, breast cancer day, etc.)

These retailer efforts may generate foot traffic. But how much of that translates into sales depends on what consumers decide to do—and it's up to retailers to successfully influence those decisions.

*AlixPartners surveyed 1,000 adults nationwide, a demographically representative sample of the U.S. population, from September 8-11, 2011.