Dive Brief:

• Wells Fargo analysts estimate retail sales during the holiday season will hit a record gain of 11% over last year, according to an emailed report.
• Notably, that forecast implies sales levels will actually drop off from earlier in the year. The analysts cited the "supply chain crisis, the difficulty finding workers to staff the stores, the highest inflation in a generation and expected difficulties with last-mile delivery for e-commerce" as reasons for caution. 
• Even if overall sales in the fourth quarter experience the largest monthly declines on record, year-over-year growth would still hit a record-nearing 8.6%, according to Wells Fargo analysts.

Dive Insight:

In many respects, forecasting the near future in 2021 has a degree of difficulty approaching that of 2020. While the pandemic casts a shorter shadow than it did last year, 2021 has brought its own bouquet of complicating factors. 

Chief among them is a global supply chain crisis, marked by high freight rates and delays. Transportation and manufacturing bottlenecks have been caused both by COVID-19 in countries that have lower vaccination rates but are essential to the world's supply and transport of goods, as well as capacity shortages that are a hangover from last year, when carriers and manufacturers faced severe demand drop-offs. 

In short, supply wasn't ready for this year's surge in demand, which was driven by government spending in the U.S. and the rollout of the COVID-19 vaccine. Spending has been so robust that the Wells Fargo team said "Christmas came in March this year." Sequential gains in March and January exceeded the typical holiday boost. 

"Despite some ups and downs in the intervening months, spending has remained elevated, putting the level of sales comfortably at a record high even before the all-important holiday shopping season begins," the analysts said.

Sales are at such elevated levels that even if many retailers face bare shelves during the holidays, as many expect, the season overall is likely to hit a record, according to the Wells Fargo analysis. If sales manage to simply hold steady with spending this year, they will still soar 13% above last year, according to analysts.

And the worst-case scenario — declines in sequential sales as bad the 2008 financial crisis and 2018's abysmal December amid a government shutdown — would still put holiday sales "a stone's throw away from a record increase," the analysts said.

Another complicating factor is the continued spread of COVID-19. Last year's holiday season took place during a deadly surge of the virus. Yet retail overall still made substantial sales gains in the 2020 holiday season. Part of that is because the pandemic has shifted much consumer spending away from travel and experiences and over to goods, to the benefit of stores.

One other risk that the Wells Fargo team noted was the possibility that consumers may have pulled forward demand from the holidays into earlier months this year. That means retailers with the highest sales increases earlier this year could face softer demand in the final months of 2021. That would include clothing and accessory stores, sporting goods and hobby stores, and electronics and appliance stores.