Thoughts on the Market: A Very Merry Start to U.S. Holiday Shopping

Released on December 6, 2024 by Morgan Stanley

In the latest episode of Thoughts on the Market, Morgan Stanley's analysts delve into the current state of the U.S. holiday shopping season, evaluating recent performance metrics, consumer sentiment, and future outlooks. Hosted by Michelle Weaver, the discussion features insights from Simeon Gutman, U.S. Hardlines, Broadlines, and Food Retail Analyst, and Alex Drayton, North America Softlines Retail and Brands Analyst. The episode provides a comprehensive overview of the strengths and challenges facing the retail sector during this critical period.

1. Holiday Shopping Season: An Optimistic Start

Michelle Weaver sets the stage by highlighting the transition from Thanksgiving and Black Friday to the broader holiday shopping period. She mentions recent positive data and key takeaways from Morgan Stanley's Global Consumer and Retail conference held in New York.

Michelle Weaver [00:14]: "Overall, we're expecting stronger spending this holiday season relative to last year. Inflation's cooled and US Consumers are more positive on spending this season versus the past two holiday seasons."

She emphasizes that the season is tracking well despite a shorter shopping window due to a later Thanksgiving, raising questions about maintaining momentum in the coming weeks.

2. Performance in Hardlines, Broadlines, and Food Retail

Simeon Gutman provides an in-depth analysis of the hardlines, broadlines, and food retail sectors, indicating a positive trajectory in key performance metrics.

Simeon Gutman [00:58]: "Traffic, physical store sales, digital sales all seem to be tracking better."

He underscores that despite the holiday season being shorter, the initial data points are upbeat, partly due to favorable weather conditions which contrasted with the adverse weather impacting consumer spending in September and October.

Simeon Gutman [01:53]: "What the good start typically portends a pretty good finish."

Gutman anticipates a frenzied final push to compensate for the lost weekend, predicting modest growth that the market is likely to absorb without significant concern.

3. Apparel and Footwear: Surprising Strength on Black Friday

Alex Drayton shifts the focus to the apparel and footwear sector, reporting unexpectedly strong performance during Black Friday.

Alex Drayton [02:36]: "The headline on Black Friday out of the apparel and footwear space was very positive."

Drayton attributes this success to pent-up demand, spurred by a cold front that encouraged consumers to shop for apparel. He provides concrete data, noting a 30% year-over-year increase in line counts, a figure that typically sees mid-single-digit growth, signaling robust demand.

Alex Drayton [03:00]: "It gives you a sense for our confidence in how strong it was."

Additionally, he highlights that promotional activities remained consistent with the previous year, dispelling fears of excessive discounting despite expectations of inventory clearance.

Alex Drayton [04:20]: "The fact that we didn't see retailers kind of push the panic button on discounting... tells you retailers are willing to wait later for the consumer."

4. Navigating Potential Headwinds

In discussing the broader holiday shopping outlook, Alex addresses several anticipated challenges facing retailers this season.

Alex Drayton [04:59]: "There's been a number of dynamics that were going to weigh on the fourth quarter no matter what."

He lists key headwinds:

• Difficult Year-over-Year Comparisons: Retailers are in a challenging position compared to previous years in both sales and profitability.
• Compressed Shopping Period: Five fewer shopping days, including one less weekend, reduce sales opportunities.
• Inventory Build-Up: Excess inventory from earlier quarters poses a risk, although many companies remain optimistic about sales trends.

Drayton notes that these challenges have been acknowledged by the market, which has adjusted expectations accordingly.

Simeon Gutman [05:30]: "It's a very challenging setup, I feel like it's mostly appreciated."

5. Insights from the Global Consumer and Retail Conference

Both analysts share key takeaways from the recent conference, shedding light on industry trends and strategic responses.

Simeon Gutman’s Takeaways:

1. Positive Holiday Tone: Companies with seasonal and weather-sensitive exposure are optimistic about making up sales momentum.

   Simeon Gutman [06:24]: "There's momentum that's being carried into the rest of the year."

2. Omnichannel Advantages: Leveraging omnichannel strategies has proven more profitable than previously anticipated, benefiting from economies of scale.

   Simeon Gutman [06:30]: "Economies of scale in omnichannel are actually more beneficial for profits than they thought."

3. Optimistic Inventory Management: Despite inventory builds, companies remain confident in consumer demand and the quality of their stock.

4. Housing Market Outlook: The housing industry is slowly rebuilding, with optimism that the market is reaching its bottom.

Alex Drayton’s Takeaways:

1. Strong Demand Driven by Weather: The favorable weather has significantly boosted holiday shopping demand.

   Alex Drayton [07:00]: "Demand in the holiday clearly a strong start in terms of the weather finally turning around."

2. Inventory Explanations: Retailers cite pull-forward strategies and adjustments for freight disruptions as reasons for inventory increases.

3. Tariff Concerns: Apparel companies are preparing to manage potential tariff increases next year, though the deflationary nature of the apparel category limits pricing power.

   Alex Drayton [08:30]: "Apparel is a deflationary category. There's no pricing power."

6. Conclusion: A Balanced Perspective on Holiday Retail

The episode concludes with a balanced view of the holiday shopping season. While initial indicators are strong, especially in sectors like apparel and footwear, analysts acknowledge ongoing challenges such as inventory management and external economic pressures. The overall sentiment remains cautiously optimistic, with the market likely to adapt as the season progresses.

Michelle Weaver [08:48]: "The preceding content is informational only and based on information available when created."

Listeners are encouraged to stay informed and consider the multifaceted dynamics at play as they navigate the remainder of the holiday shopping period.

This comprehensive analysis by Morgan Stanley’s experts provides valuable insights into the current state and future expectations of the U.S. holiday retail market, making it essential listening for investors and industry stakeholders alike.