Corporate Christmas List

Five things CEOs are worried about this holiday shopping season

November 14, 2012
November 14, 2012

With earnings season unofficially drawing to a close—after Wal-Mart, Target, and other retailers report earnings tomorrow—we’re getting our first picture of how companies expect consumers to spend during the period between Thanksgiving and New Year’s Day:

Per usual, retailers have high hopes that the holidays will allow them to meet their sales guidance for the year. This is nothing particularly new; for US and Canadian retailers, fourth quarter sales are often far higher than any other time of the year as businesses engage in massive promotions to draw holiday shoppers into their stores. But after a weak third quarter—and an October in which US retail sales fell a greater-than-expected 0.3%—this year’s concluding quarter will be even more crucial for companies trying to meet their yearly earnings and revenue projections.

That said, they aren’t too optimistic that sales will grow dramatically in comparison to last year. Particularly in electronics (perhaps excluding new Apple products), retailers have described demand as soft. Three hundred and sixty-eight of the 777 companies that reported earnings in October and November—the two most popular months of the fall earnings season—revised their expectations of sales per share for 2012 downward, according to data compiled by Factset. Bottom line: things already looked ugly, and now they’re looking even uglier.

Retailers in general aren’t building up huge inventories to meet high volumes. In some cases, retailers have built up stores of products in the last few months in preparation for this moment. But for the most part, various retailers vowed that they’re trying to keep their stock fresh for shoppers, who are likely to prefer new items in the period right after Christmas and into early 2013. We just aren’t sure that this is actually the case. Retailers may also be adjusting for sub-par projections of consumer demand, expecting that they simply won’t be selling as much stuff.

Superstorm Sandy has presented a new wildcard for retailers in the Northeastern US. Retail sales data from the last few weeks already indicate that they lost some business during and immediately after the storm, however most are unsure if these losses will carry over into the holiday season. Certainly, small businesses that faced damage in the storm could suffer from ongoing delays in reopening stores and loss of income, however it seems that even the country’s largest retailers are keeping the storm in mind.

Last but not least, they’re concerned about falling demand in Europe. Retailers pretty resoundingly cited concerns about the future of their business operations in Europe, although a handful of discount retailers like T.J. Maxx cited new efforts to increase market share among frugal buyers.

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While we’re at it, we’ve compiled some of the most interesting commentary about the greater macro outlook for the holidays that we’ve heard from company executives this month.

It’s what everyone in the US business community is talking about right now, so it’s not surprising that Jeffrey Siegel, CEO of Lifetime Brands, worries that concerns about the “fiscal cliff” and a new debt ceiling debate will curtail consumer demand:

Of course the big unknown remains how the government deals with the fiscal cliff and how this is played out in the media. It has the potential to weigh on consumer’s psychology in the coming months, which certainly could impact holiday sales. That said I am optimistic about the holiday season in general and about Lifetime’s business in the fourth quarter.

John D. Idol, chairman and CEO of Michael Kors Holdings, cites superstorm Sandy as an important unknown in holiday shopping patterns:

There are gas lines as we’re all aware of and I think there’s also a psychological effect on the people in the immediate kind of metro New York area, where their homes have been affected. And so I think until people recover from some of this startling situation, we want to be cautious about what’s going to happen in that region.

Rupert Duchesne, CEO of global loyalty program designer Aimia, is concerned that the economic data could come in cool across the world:

I think our view at this point, and obviously we have some – both from macroeconomic analysis, as well as some indications through October, is that it certainly will be choppy up to the holiday season and we’ll just see what happens then.

MetroPCS CFO J. Braxton Carter said he has high hopes for next quarter, seeing the potential for a large increase in customers upgrading phones:

Last year fourth quarter we saw 13% of our base upgrade to a new handset. This year, we think it could be substantially higher not only from third quarter of last year, but we think it could be substantially higher – or third quarter of this year, we think it could be substantially higher as compared to fourth quarter of 2011. Again, it was 13% there; it could be as high as 18% to 20% in the fourth quarter of this year.

PC sales in particular are likely to disappoint, says Jen-Hsun Huang, president and CEO of nVidia:

The end-markets are softer than this time last year. I guess I’m surprised that you asked at all, although I think the overall market seems to indicate that the holiday season for PC sales is a little softer than expected. And it’s global, it’s not particularly related to one particular geography. But China is softer, Europe is softer, the U.S. seems okay, but the vast majority of the end-markets appear to be uncertain.

Seung-Woo Choi, President of NEXON Co., agrees:

We have made this change in order to reflect a reduction in our expectation for PC business primarily as a result of lower expectations in North America and Europe for the Christmas holiday season, as well as our focus in our content update in Korea and in China on engagement over near-term monetization.

Jeremy Andrus, the CEO of headphone brand Skullcandy, suggests that there are too many unknowns to guess how the holiday season will play out:

The overall retail environment is definitely a bit uneven right now in the U.S. and overseas, particularly in Europe. Over the past few months, we have seen retailers become more cautious in their outlooks for the holiday season, and at this point, it is impossible to gauge the impact of Hurricane Sandy…Layering on some added caution about Europe and the escalating promotional environments surrounding the holiday contributes to even less visibility in the product and geographical mix, gross margin and promotional expense in the fourth quarter.

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