Shoppers outside a Target store ahead of Black Friday, in Clifton, New Jersey, November 26, 2024.
Victor J. Blue | Bloomberg | Getty Images
As the holiday season heats up, retailers have a new opportunity to attract even the most selective shoppers and convince them to splurge on luxury items like party outfits, makeup or toys.
But the discretionary season does not lead to an increase in turnover for everyone.
Retailer earnings reports over the past two weeks have shown a sharp divide between brands that are generating sales and those that are losing sales.
Goal, Kohl's And Best buy All reported disappointing third-quarter results as early holiday promotions failed to meaningfully boost their businesses. On the other hand, Walmart, Dick's sporting goods And Abercrombie & Fitch posted strong sales in their most recent quarters.
The reports come after a more than two-year period of inflation in the U.S. that caused consumers to become selective in their spending while balancing higher prices for groceries, housing, restaurant meals and more. These patterns have persisted even as inflation has subsided, forcing retailers to work harder to get customers to open their wallets.
Picky consumers have widened the gap between successful and struggling retailers ahead of the holiday shopping season, says Neil Saunders, managing director of GlobalData Retail.
“People are still spending money, but they may not have as much to spend,” he says. “So instead of buying five things, they might buy three things. And in that environment, it's easy to say, 'Where shouldn't I go to buy things? Who should I take out?' And they will take out the weak retailers.”
Creating expectations
Holiday spending in November and December is expected to rise 2.5% to 3.5% from 2023 to between $979.5 billion and $989 billion, according to the National Retail Federation, a retail trade group. That's a smaller year-over-year increase than the 3.9% jump between the 2022 and 2023 holidays, when spending totaled $955.6 billion. The NRF figure excludes car dealers, gas stations and restaurants.
Still, retailers' forecasts for the holiday quarter varied widely. Dick's and Abercrombie both raised their full-year outlooks this week, saying they expect a strong holiday shopping season.
“We've seen a strong early response to our holiday lineup, and we're ready and excited for the peak sales period to kick into high gear this week,” Abercrombie Chief Operating Officer Scott Lipesky said Tuesday during the company's earnings call.
Northstream And Walmart struck a more cautious tone.
During Nordstrom's earnings call Tuesday, CEO Erik Nordstrom said the department store owner noticed slower shopping trends in late October and factored them into his forecast. The company offered a moderate adjustment, raising the low end of its sales forecast despite beating Wall Street sales expectations for the third quarter.
Walmart Chief Financial Officer John David Rainey told CNBC that the holidays are “off to a pretty good start,” but consumers are still cautious about their spending and waiting for better prices.
The big box retailer increased its sales forecasts and the results, however, reflected a promising change in trend. For the second quarter in a row, Walmart's sales of general merchandise (items outside the grocery section or home goods aisles) increased year over year. Previously, general merchandise sales had fallen for eleven quarters in a row.
Rainey said this change likely reflects both waning inflationary pressures on households as food prices fall, and the company's ability to sell more discretionary items as it has added more to its website through its third-party marketplace.
Target and Kohl's had dire forecasts. Kohl's warned that sales will fall deeper than expected and announced a CEO change ahead of the crucial shopping season.
Target said it expects comparable sales for the holiday quarter to remain about flat. That metric includes sales on Target's website and at stores open at least 13 months.
Despite the meager forecasts, Target is highlighting the ways it is trying to capture shoppers' attention and money. During a Nov. 20 earnings call, Chief Commercial Officer Rick Gomez said Target would carry more than 150 items inspired by Universal's movie “Wicked,” including clothing, food, beauty items and toys. An exclusive vinyl and book for Taylor Swift fans will also be released on Black Friday.
Target will also lean on a tried-and-tested retail tactic to drive traffic: It will lower prices on 2,000 additional items for the holidays, after lowering prices to 5,000 items earlier this year.
Wants and needs
GlobalData's Saunders said Target, Kohl's and department stores like Macy's are in a tougher position this holiday season as they sell more wants than needs.
Customers are “more inclined to experience” this year and want to purchase gift items that have practical value.
“The little stupid games and new socks and stuff – those are the areas where people are really cutting back a little bit because they're just pointless purchases, and people don't want to waste money, even if it's just for a gift,” he said. “They want the gifts to be useful and relevant.”
Some businesses may have purchased too much inventory ahead of the shopping season – or the wrong mix of items. At Kohl's, for example, Saunders said he's seen a lot of clothing and small appliances, such as coffee makers and air fryers, on display as the store gears up for Black Friday. If shoppers don't show up in full force, these items could end up on the clearance rack.
“I just look at it and think, 'Is this going to sell?'” he said. “Because you are not yet attracting visitors to the stores. So why will that change during Black Friday?”
Marshal Cohen, chief retail advisor at market research firm Circana, said the winning formula this holiday season will be value, not only with lower prices, but also with the perception of “the best bang for your buck” with items that are new or high quality.
And, he added, retailers are already blaming external factors when the holiday season is disappointing.
“Every year, retailers always position themselves to have a good reason why they might not hit their numbers,” Cohen said. “So when they're talking about the weather, or they're talking about a port strike, or they're talking about supply chain issues, it's more to do with the fact that they're hedging their bet that they might have some challenges ahead.”
“I always say, 'Okay, here comes the excuse this year. What's it going to be?'”
Disclosure: Comcast is the parent company of CNBC and NBCUniversal. NBCUniversal distributed 'Wicked'.
— CNBC's Gabrielle Fonrouge contributed to this report.