Looking ahead to the 2023 holiday season, we'd start by pointing out that every holiday season is fraught with uncertainty and every holiday forecast carries some nuance. Still, there are some trends developing that seem more certain than others. We would observe that this season’s calendar is nearly identical to last year, with the one benefit that Christmas falls on Monday which allows for a full weekend of shopping--that weekend creates more of an incentive for households to shop closer to the holiday, which has been the consumer preference for most of 2023 and was true of Halloween. Like all holidays, every retailer and brand needs to win the season and “take more than their fair share.” And so, we should expect the season to be brutally competitive, that’s typical. New to the scrum this year is Temu, which as we wrote last week, appears to have won Halloween (on a relative basis) and disrupted the seasonal event for many retailers. We’d expect Temu to be disruptive to Christmas as it had little presence last year. Other dynamics to consider for the season include:
Last year, holiday sales staged a rally in the two weeks approaching Christmas (Dec. 10-24) despite adverse weather in many markets. As such, it won’t be until these weeks that one can get a true feel for this season’s strength. Another feature of last year was that households waited for deals to break lower as due to a prevailing media narrative that retailers were loaded with excess goods that they needed to clear. However, this year, retailers don’t have excess inventories. Inventories have been well controlled all year and most recently we’ve cited further order cancellations in the outdoor and luxury categories. This week, Ralph Lauren reported that its U.S. wholesale business experienced a double-digit decline in units (i.e., sell-in) with its CFO Jane Nielsen saying, “We carefully manage sell-in to the channel to align with softer consumer demand.” The only areas that continue to have excess are electronics and some home--the two categories still suffering from post-pandemic normalization. Beyond these two and categories where Temu does NOT play, we'd expect to see healthy average unit retail (AUR) and gross margin expansion. This was evident in Dillard’s reported results this week.
Where are households going to get the funds to buy gifts? Well, the economy and jobs & income on an absolute basis are in a good place and better than at this time last year when inflation was running too hot and many were “forecasting” an imminent deep recession. Also, in terms of consumer expenditures, most of this past year has seen services gaining share from goods, which led to downward pressure on retail sales. Celebrating Christmas is principally at home and about sharing gifts and goods. As such, we expect that spending on services will take a break for Thanksgiving and Christmas, which will be an “absence of a headwind” for retail.
On the inflation front, inflation has moved sideways over the past several months. Historically, year-over-year changes in the core Consumer Price Index (CPI) has a highly negative correlation with discretionary sales. Excluding food, energy, & shelter, the CPI has been little changed since April and the figure has a good chance to slow to +2.7% on a year-over-year basis for December. Grocery inflation has a good chance to slow to below 2% by year-end. A retreat of packaged food prices would be a substantial relief for discretionary spending; we remain hopeful on that front. Also of note, the decline in prices at the pump should be helpful. (The U.S. Energy Information Administration reported regular gasoline prices of $3.40 per gallon last week l versus $3.80 last year.)
Thrift and value will likely play a central role in this year's holiday season, much as it has the past year. Below we show the 52-week rolling traffic trend between off-price and department stores. There has not been any material shift in the bifurcation. While middle-income and more affluent consumers have money to spend, they want to be seen shopping at retailer brands known for “thriftiness.” Some of these consumers may in fact be profligate spenders, but they want to be perceived as “thrifty shoppers,” especially when they are posting on TikTok, Instagram, and other social media.
We suspect that this is what is behind T.J. Maxx/Marshalls large traffic gains this quarter (+12%). We looked at segmentation for different markets, where T.J. Maxx has a lot of locations. In Florida, the brand was up +16% in visitation on average. The two larger psychographic segments (using AGS Panorama segments) of customers in Florida for T.J. Maxx are Rising Fortunes (visitors up +26% year-over-year) and Sprawl Success (visitors up +21% year-over-year). The Rising Fortunes segment represents young singles and childless couples, and the typical Rising Fortunes neighborhood is primarily newer, rented townhouses and small apartment complexes. The Sprawl Success segment represents high-income younger families with children in the outer suburbs of major cities. Increased visits from these customer segments would kind of support our hypothesis, but not prove it. That said, in the past, we have shared that part of T.J. Maxx’s secret of success is the masterful use of social media to acquire new customers and drive visitation.
With this trend locked in, we expect off-price retails to outperform and for department stores to be pressured for the holidays, but hopefully by less of an extent than fiscal Q3 2023 from Aug-Oct 2023. Kohl’s should outperform its peers given the lift from Sephora at Kohl’s. Separately, as shared over the past year, brands that are driving an improved conversion rate, experience improved traffic and sales momentum in the forthcoming quarters. Specialty brands that we called-out for this improvement during fiscal Q2 2023 results include Anthropologie, Free People, Abercrombie & Fitch, and Lululemon (see our previous report titled Apparel Retail: Idiosyncratic Success).
One of our more popular insights this year has been our call-out of the acceleration in secondhand goods. However, this week ThredUp reported Q3 2023 results and offered an Q4 outlook that was well below expectations. ThredUp CEO James Reinhart saying, “Whether it was Amazon or Walmart or Target, I think we were experiencing was pretty aggressive promotion across the retail space [in October]. And so we obviously responded to that through the month...October was very promotional. We really had two paths. And one path was to be like promotional and sort of drive margin expansion. But we thought really active buyers is the name of the game. And so it was a better strategy to provide a little bit more discounts and a little bit more on the promotional side to both drive active buyer growth and continued engagement...And we expect the environment to continue to be promotional in 2024.”
Looking at secondhand brand traffic, we see that there was a step-down in October, both on a one-year and multi-year basis. Previously, we highlighted Plato’s, Buffalo Exchange, and Savers as indexing high in Millennial, college-educated, females (i.e., customers with more student loan debt). This is also true of ThredUp. And so, student loan debt may be a headwind for the holidays, but at this point given that October is a shoulder period, we think it's too soon to make that call. Another factor for these secondhand brands may be Temu and Shein. This appears to be new headwind hitting ThredUp, and if they are impacted, it would make sense that Temu/Shein are also headwinds to Plato’s, Buffalo, and other thrift stores.
The slowdown in thrift store visits was also affirmed with Savers’ Q3 2023 results (where comparable-store sales grew +3.7) and its outlook for flattish comps in Q4 based upon softer demand/results for soft goods. We believe that softer demand shows itself in the slowdown in traffic, a decline in the conversion rate, and fewer units per transaction (UPT). (Recall that Savers AUR is under $5.00.) Management highlighted weather as the drag, but weather wasn’t anomalous in Washington and California in September and October, and the trend is similar in those states to the chain. Moreover, management said the hardgoods category experienced little slowdown (i.e., products like books, electronics, cookware, etc.). Softgoods include Halloween outfits. Given that the traffic slowdown was quite dramatic going into Halloween and switched to +8% for the week following Halloween, that provides good evidence that Temu was a drag.
Looking at e-commerce beyond ThredUp, both Etsy and eBay cited a slowdown in October and gave below-expected guidance for Q4 2023. Etsy CFO Rachel Glaser stated, “We are working vigorously to deliver growth this holiday season, yet we anticipate that it will be challenging to do so given a multitude of headwinds...In addition, we are seeing a highly competitive landscape for advertising with some competitors investing without an eye to ROI. To be clear, this is not a game we will play. Etsy's performance marketing spending models dynamically adjust pulling back when we reach marginal return thresholds. So higher CPCs could naturally reduce our spend for paid traffic...Etsy primarily is and particularly nondurable discretionary goods is the piece that's really under pressure and is receiving a lot of the headwinds from the macro. The increases in spend in nondurable goods is primarily in essentials and items that are heavily discounted. So we're really in the sweet spot of the eye of the storm, I would say.”
Etsy CEO Josh Silverman shared, “No question that Temu and Shein are having an impact in the market. You don't get that big that fast without taking share from many people. And I think we and most players in e-commerce have had some impact. And the other thing that is happening is they're spending a large amount of money on marketing, not clear that they're using ROI thresholds to do that. And so I think those two players are almost single-handedly having an impact on the cost of advertising, particularly in some paid channels in Google and in Meta.”
And so, in addition to softer consumer spending, high advertising spending by Temu and Shein is disrupting the market. That will put those brands with physical stores at a relative advantage in terms of customer acquisition spending to those without stores, such as ThredUp. (The NY Times had an article out this week on legislative action to inhibit the $800 per order de minimis exception.)
Prestige luxury has had a soft 2023 due to aspirational luxury consumers cutting back and affluent households off on international holidays. Given that the holidays are traditionally spent with family, that creates more opportunity for the purchase of luxury items in the U.S. As such, we’d expect a bounce for the prestige luxury category over the holidays.
Those categories that have clicked all year long, would seem likely to maintain their momentum for the holidays--this is true for prestige beauty. We’ve written extensively on Ulta and Sephora this year. Interestingly, they too have seen a moderation during October (slowing about 10 points). This may also be due to student loan repayments, or it may reflect being in a shoulder period. October was similar to September on a multi-year basis and September was the first month where repayments started. Ulta reports earnings on Nov. 30, and we will be listening to their characterization of October-November. All told, while prestige beauty’s momentum may be moderating, it’s still a strongly outperforming category, and led by fragrance. Recent favorable commentary from L’Oreal and Estee Lauder also reflect this outperformance.
We’ve spoken a bit about divergent visitation trends within the home furnishing retail category this year, with home furnishing retailers more oriented around housewares and home entertaining products like Williams-Sonoma performing well on a relative basis (albeit with visits still down year-over-year) and those that skew heavily toward furniture generally seeing double-digit declines in visits on a year-over-year basis and underperforming the other discretionary retail categories. We suspect these trends will carry through the holiday season with home entertaining retailers outpacing furniture retailers (although the trend of consumers “buying late” will likely play out in this category as well).
Historically a mainstay on many consumer’s holiday wish lists, it’s looking like many of the trends plaguing the broader consumer electronics retail category this year may also weigh on holiday visitation trends. As we’ve pointed out this year, including the pull-forward in consumer electronics demand during 2020-2021 (as consumers enhanced their home offices during the pandemic); a lack of new product cycles/innovation across multiple consumer electronics categories (more on that in our commentary on Apple below); and an increase in smart home products being sold across other channels. There are some new releases on the video game front that could help to stir some consumer demand and drive visits, but we suspect that it will be 2024 before we see sustained improvement in this category as we start to hit a replacement cycle for many consumer electronics purchased during the pandemic (the average consumer product life cycles is 3-7 years, depending on the category–lower-end mobile phones, computing, and home theater likely to be the most active replacement categories) and more nascent technology trends (including cloud, augmented reality, generative AI, and expansion of broadband access) stimulate demand.