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Holidays a Litmus Test for Retailers Post September Sales Drop

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U.S.-China trade tiff, volatility in crude prices, sluggish business spending, slowdown in manufacturing sector and certain geopolitical issues are now impacting consumer behavior and in turn spending activity. While consumer confidence — a key determinant of the economy’s health — witnessed the steepest fall in nine months during September, retail sales also slid for the first time in seven months. The metric last declined in February.

Market pundits indicated that the aforementioned factors are enough to fuel apprehensions about the economy losing steam, which otherwise has witnessed the longest expansion on record since June 2009. Well if consumers choose to tighten purse strings, retailers have to tough it out this holiday season.

Brick-&-mortar retailers will surely be looking for green shoots of consumer spending recovery in hopes for improved business activities during the festive period. Notably, dismal September sales have raised the probability of a cut in benchmark interest rate for the third time this year, largely to get consumers to splurge again.

What Happened in September?

The Commerce Department stated that U.S. retail and food services sales in September fell 0.3% to $525.6 billion on a sequential basis. This follows a slightly upward revision in August’s reading that now shows a 0.6% gain instead of 0.4% growth earlier. Notably, retail sales improved 4.1% from September last year.

The report suggests that sales at motor vehicles and parts dealers, and building material dealers fell 0.9% and 1%, respectively, from the previous month. Receipts at gasoline stations slid 0.7%, while sales at food & beverage stores declined 0.1%. Meanwhile, sales at sporting goods, hobby, book & music stores were down 0.1%, the same at general merchandise store fell 0.3%.

We note that sales at both furniture & home furnishing stores as well health & personal care stores grew 0.6%. While sales at clothing & clothing accessories stores jumped 1.3%, food services & drinking places improved 0.2%. Although, sales at non-store retailers decreased 0.3% on a sequential basis, the same improved 12.9% from the prior-year period.

Will Holiday Season Bring Back Lost Mojo?

Some experts believe that the fall in retail sales may be a temporary phase, as consumers remain in good shape, courtesy of a solid job market. This is evident from the 50-year low unemployment rate of 3.5% in September. A sturdy labor market is likely to stimulate consumer spending — one of the pivotal factors driving the economy — during the festive season.

Moreover, the National Retail Federation’s holiday sales projection of a tick-up in retail sales in the band of 3.8-4.2% (excluding automobiles, restaurants and gasoline) hints at increasing basket size and more traffic with retailers as ultimate gainers. Online and other non-store sales are expected to grow 11-14%. Last year, holiday sales rose just 2.1%, per NRF.

Further, data compiled by Deloitte indicates that holiday sales are expected to increase 4.5-5% and exceed $1.1 trillion between November 2019 and January 2020. Meanwhile, e-commerce sales are estimated to improve 14-18% to reach $144-149 billion.

No wonder the holiday season, which accounts for a sizeable chunk of yearly revenues and profits, is a make or break time for retailers. With only a month left for the festivities to begin, retail bellwethers from Amazon AMZN to Walmart WMT and from Macy's M to Gap (GPS - Free Report) are pulling up socks to capitalize on this upcoming season. Retailers such as Target TGT, Kohl’s KSS and Dollar Tree DLTR have also announced their hiring plans for the upcoming festive period.

Definitely, retailers are ready to walk the extra mile this time around too, to woo bargain hunters. They are deploying resources to enhance omni-channel capacities, introducing new brands, remodeling or refurbishing stores and expanding same-day delivery options to expedite the shopping process during the busiest part of the year. Retailers are even trying to absorb higher costs related to tariffs and keep consumers unaffected.

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