Dive Brief:
- U.S. holiday sales growth is likely to slow to about 3%, down from 4.7% a year ago, S&P Global Ratings said in a Tuesday report. That’s below the 10-year average of 5.3%, the credit rating agency said.
- Retailers that rely heavily on discretionary consumer spending face a higher likelihood of a credit rating downgrade within the next 24 months, S&P said. Apparel, accessories and speciality retailers have seen the largest increase in negative ratings in the last 12 months.
- S&P said its outlook is based on declining yet persistent inflation that continues to pressure household budgets. The report also cited a late Thanksgiving holiday, which cuts five shopping days from the calendar this year, as an additional contributing factor that may weigh on sales.
Dive Insight:
Retailers are likely to rely on deals to drive sales in anticipation of softer holiday performance this year, S&P analysts, led by Lauren Slade, said in their report. Companies will need to spend more on advertising to make up for lower traffic and compete for attention, the analysts said.
Holiday retail sales performance will vary by sector, according to the report. Value retailers focused on middle and higher income consumers will likely fare better as a result of higher foot traffic from value-seeking consumers. Big box retailers like Target and Walmart are also likely to perform well this season due to their ability to communicate and offer value to customers.
S&P also identified 33 retailers and apparel manufacturers that generated over 25% of their annual operating income from holiday sales in the most recent fiscal year. Victoria’s Secret & Co. leads the list, with 90% of its total reported operating profit occurring during the fourth quarter. Macy’s was third on the list with 65% percent of its operating profit generated during Q4. “Without a jolly holiday season, we could see incremental rating pressure for these retailers,” S&P said.
In contrast, consumer electronics and home furnishings retailers face softer demand and will need to tap into promotional activity to spark sales, according to the report. Total retail sales for November and December peaked at 16% growth in 2021 but have fallen sharply since, according to U.S. Census Bureau data cited by S&P.
Starting in October, major retailers, including Amazon, Walmart, Target and Best Buy launched holiday-focused sales promotions nearly a month and a half ahead of Black Friday, which falls on Nov. 29 this year. Retail sales between Black Friday and Cyber Monday are expected to reach $75 billion for the first time, according to an October report from Bain & Co.
“Retailers may be trying to pull forward sales as consumers grow more cautious during the weeks leading up to the holiday, particularly during an election year and a shortened holiday shopping window,” S&P said. “These steep discounts and big deals also reflect the highly promotional environment this season as value remains front of mind for consumers.”
Furthermore, price-sensitive consumers will lead retailers to continue promotions and discounts, which will further pressure profit margins. Many retailers have announced cost savings initiatives in the last 12 months and pivoted their inventory management to “a conservative approach” as a strategy to support margins. These moves are likely to lead to flat year over year margins for retailers, S&P said.
S&P’s holiday outlook aligns with a recently released report by the National Retail Federation, which expects that holiday sales will grow 2.5% to 3.5% from a year ago, despite some mixed signals in the economic indicators that shape its forecast.
