What Does the Holiday Season Have in Store for Retailers This Year?

The days of crazy Black Friday sales with outrageous doorbuster deals that result in stampedes are largely over. Instead, the holiday spending has spread out with consumers starting their shopping as early as Halloween.

In this episode of Industry Focus: Consumer Goods, Vincent Shen and Dan Kline explain why Black Friday has evolved into what it is today, how the changes affect companies that rely on this critical period, and what the forecast looks like for the remainder of 2016.

A full transcript follows the video.

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This podcast was recorded on Nov. 22, 2016.

Vincent Shen:Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It isTuesday, Nov. 22, and I'm your host, Vincent Shen. Joining me via Skype fromWest Palm Beach is fool.comcontributor Dan Kline. How are you, Dan?

Dan Kline: I'm great. How are you?

Shen: I'm doing well. With the time of the year, and a topic in the newstaking up a lot of headlines around this time of year with Black Fridayand Thanksgiving, I figured we really couldn't help ourselves,we have to do a Black Friday/holiday season special, andtalk a little bit about some of the different strategiesand other developments we're seeingin the consumer and retail world. I figure first we can tacklesome of the bigger-picture expectations for this year. Then maybe we can dive a little bit more into the specific trendsin the industry,how specific companies are approachingthis very important period for a lot ofthem. How does that sound?

Kline: Absolutely. It comes down to,Black Friday is not quite as big as it once was,but it's still absolutely enormous. The season itselfis spreading out. You've been able to get Black Friday dealspretty much since Halloween ended. But a large percentage, above 21% ofpeople who are going to shop,are still going to shop onThanksgiving, and leading into Black Friday,that number is going to almost double. So it's still a giant deal. About 45% ofAmericans will shop onBlack Friday itself, and60% will shop between Thanksgiving and Sunday.

Shen: With that in mind,so many people in this country go out andpurchase one thing or another, gifts or whatever it may be, looking for those deals,on Friday, on Cyber Monday, and throughout the next six weeks. Myquestion to you is, is there anything on your list?

Kline:I'm going to buy some technology. I'm going to buy anAppleWatch,I'm going to buy aGoogleHome,and I'm going to pretend I'm buying them because you're making meso that I can actually understand them for future shows. But the reality is,most of those items are cheaper. Anything technology-related. Apple,youhaveto go to Apple vendors.Best Buywill have deals on Apple products. Apple might. They have in the past. But,in general, they will push you toward their vendors. [Amazon.com's]products are allcheaper on Black Friday,sometimes dramatically so. And Google Home is $99, down from $129. So it's a great time to buy certain things. But that brings up the wholeBlack Friday idea --this is not a day or weekend where you can just go to the stores or jump onlineand assume that everything you're buyingis a good price. You still need to be diligent and check,because the reality is, there'sa lot of models and a lot of things wherethey're saying they're 50% offand they're actually slightly different model numberswith less features, or they're playing games there. So this is still a time whenyou have to be very careful and comparison shop.

Shen: I've also seen some of the studies they do where they sayas much as even one in four itemsthat you see in a Black Friday circular,something like a promotion or an email,is actually the same as what they were offering as a doorbuster,or a very attractive item, in terms of discount,from the previous year. At the same time,some people have complained thatcompanies will raise their pricesso they can advertise a bigger percentage discount, but in actuality,you're really getting less of a deal there. But I think everyone has seen firsthand the long lines, thecrowded stores, and the overall mania that comes withthe season, especially this upcoming weekend.

I'dlike to put into perspective for our Fools who are listening --when you take some of the most well-known retailers in this country,and you look at their calendar fourth quarter,what kind of impact this period hason their annual results, it's pretty significant. Some major retailers thatoften come to mind --for example,Macy's, theirfiscal fourth quarter runs fromNovember through the end of January. Therevenue from that season made up just under one-third of their total top line from the year, but over half of net income for the year. Then,if you look at aWal-Mart,for example, about 27% of revenuecomes from that quarter, but over 31% of their bottom line. Big competitorTarget, 29% of revenue, 40% of earnings.Best Buy really surprised me -- one-third of their sales will come from thisholiday shopping period, but over half of their bottom-line profits aregenerated in this quarter. Evenif you go to Amazon, you're looking at80% of their profitscoming from the fourth quarter.

Whatabout specifically in 2016? I know there are these expectations. The National Retail Federationsays that over137 million people will be consumersbetween Thursday and Sunday, out there shopping, be it online or in stores. You said 20% onThanksgiving --

Kline: Yeah,it's about six in 10 Americans will shop overall.

Shen: What about theexpectations for this year? Bullish, bearish?

Kline: Bullish. Numbers aresupposed to be up. About 3.5% was theoriginal prediction. Things started a little bit slowly. The election cast a little bit of a cloud. And those early weeks whena few companies, likeOffice Depot, weregetting out really ahead with their Black Friday deals early,sales were a little bit tepid,because the country was in a, first, "I don't know who's going to be president,"and then maybe a little bit of confusion after the election. But it does seem likeoverall sales are going to be up. And withwhat you said about the percentages for all these big retailers,I would argue that for a Wal-Martor a Target or Best Buy, it has become even moreimportant, because digital sales are going to grow 9%-10%. If you're Best Buy and youcapture a digital customer,your ability to sell to them the rest of the year --you already have their credit card information and their email -- itputs you on on a more even footing with Amazon. It's great if a retailer can get people in and get a lot of sales. But if they cancapture that info, they'resetting themselves up well for the rest of the year, next year.

Shen: Yeah. As we'll seeas we get into the second part of our discussion around some of those broader trends, andwhat companies are doing specifically, a big part of it that will here underlieevery single thing we see with these companies is that they'rebalancing their efforts between theirphysical retail locations,if they are a traditional brick-and-mortar chainlike Wal-Mart or Target, like you mentioned, versus theironline presence and online business, trying to strike the right balance about where to focus, because you obviously have the stronger growth in the digital space, butalso balancing the fact that they have these stores andthey want to leverage them wherever possible.

Kline: I think the rules have changed a little bit. We all remember the days ofpeople bashing each other over the head to get a Cabbage Patch Kid, or whatever the hot doll --you don't remember that, butsome of us older folks remember that. There are still some hot toys that will sell out,and maybe you won't be able to get themuntil Jan. 5,but the reality is,stores have been promising availability. You can go online, you can buy something,you can pick it up in the store. Even if they're out of something, you'll get a rain check,it'll be relatively quickly. Stores have done amuch better job managing expectations andmanaging inventory.I think it's been a couple years since you've seen the story abouta stampede of people at Wal-Mart wheresomebody gets crushed. They have spread out the season, and throughmanaging distribution, they have changedexpectations. So I don't think, as much as you're going to get alarge amount of people shopping on Thursday and Friday,you're not going to get the same level of camping out so people can get --I don't even know what the hot toy is. Maybe a remote-control BB-8, orwhatever it might happen to be.

Shen: Yeah. I feel like what'salso helping to potentially preventsome of those crazy headlines that you see, with the stampedes, waiting, huge hordes of people waitingat the doors for when they open at God knows when in the morning --I think it also helps that people aremore informed now, in general,in terms of what the options are,because they have their mobile devices, they can shop online and price-check how good the deal really is. I have something here that says nine out of 10people will do online research before going to stores to make a purchase. Eight out of 10 people who havemobile devices will be using them actively when they're out shopping to price-check,maybe look at reviewsand make a more informed decision. I think that also helpsalleviate some of that pressure,whereas before, you felt likethis was the only opportunity, like, "I need to get this doorbuster deal."

Kline: It does.I think stores have learned their lesson. You remember the days whereWal-Mart would have one television,back when a 32-inch television cost $400, and they would have one for $99, andpeople would kill each other trying to get it. Youdon't really see those limited-availability deals anymore.A few places are running "while supplies last," but for the most part,stuff is available. And most of retailers are taking the Amazon approach. Alot of things are discounted; nothing is ridiculously discounted. You're not going to get a new $1,000laptop for $150. There might be some deals like that, but very few.

[ ... ]

Shen:Some of these trends and how they're playing out atspecific companies that we know and love -- one thingI want to talk about is in-store pickup. We have mentioned Wal-Mart a few timesalready during this episode. In the past year, they've beenpromoting various in-store pickup initiatives. A big one wascurbside grocery service. They haveexpanded that into new and established markets this year. In terms of thepenetration that has seen -- Target says about 15% of itsonline orders get picked up at stores. Overall, the big benefit of something like in-storepick up is that it helps drive traffic to stores, wherepeople will hopefully make other purchases. Even aJ.C. Penney,I was really impressed to hear thatconsumers pick up as much as 40% of their onlineorders from J.C. Penney department-store locations. That is arelatively new capability for the company. Management has commented thatthe best part of that is that40% of those shoppers who pick up orders in storesend up making an additional purchase when they're there anyway.What do you think? Have you seen more companies marketing this?

Kline: I think it's very important during the holidays. As a shopper,I don't want to brave the traffic, leave my house, to hopeI get whatever device it is, orcoffee maker, whatever ridiculous thing I'm going to buy for myself this holiday season.I want to know I'm going to get it. So if I can't order it on Amazon, andI'm going to buy it at a physical retailer, fromWal-Mart or Target or J.C. Penney,I want to be able to place the order and know that when I get to the store,it's going to be there. Now that I'm going to have to wait in line or fight through it. That is a really strong positive.I don't see it being an issue the rest of the year. The rest of the year, it's a lot easierto just go to the shop and pick something up than to wait in a customer-service line andpick up your online order. I've done that a few times,as we've talked about on the show before,and it's not the easiest system in the world -- though I expect they will be throwing more people at itfor the holidays. But it's going to be very important for those companies,because it's going to put people in stores. They still have to check out, they still have to wait in line. They'regoing to see a lot of stuff, they're going to spend more money.

Shen: Yeah. Something with that as well that'sanother perk that comes along with an initiative like this is how it impacts how the companies manage their inventory,how they can clear out their inventorywithout taking hits,in terms of being forced to put on major discounts or markdowns. The idea basically is,if your local J.C. Penney location can fulfill that online order bybasically pulling that item off the shelf, the company can avoid that shipping expense -- so, that's alreadybenefiting their margins and their profits -- and,also, it will help them clear out their inventory,so they don't have things sitting around that they need to clear out for new products, and they take a hit byhaving to put it on clearance later down the road.

I want to talk a little bit about how other companies are approaching thiswith inventory management. This is something that I've had severalepisodes recently talking about,something like with SKUrationalization,stock-keeping units, how people are trying to simplify whatthey keep on their shelves,making their overall business, their operations,much more efficient and profitable. The thing is,that can mean not just simplifying product lines,but also being more cautious aboutthe amount of inventory you keep on hand. Dan, you'll remember, last year, for example,a lot of people were still wearing shorts and flip-flops well into November. And a lot of apparel retailers got hit.

Kline:I'm wearing shorts and flip-flops as we speak.

Shen: OK, so not quite fair, with youdown in Florida. But even here,only this past weekend in Washington, D.C., has it really started to get very cold. Andlast year, a lot of apparel retailers got hitholding on to tons of their cold-weather apparel,and eventually having to discount that, put markdowns on that in order to help clear the inventory.DSWwas one example, where they're approaching this year much more cautiously.

Kline: There'salways going to be things you can't predict. We've talked about,I'm in Southern Florida. If you go to Target right now, there are no warm-weather clothes,because they have basically decided --even though it's still 75, 80 degrees some days --they have decided it's fall, or, our version of fall, so there's long-sleeved T-shirts, there's pants. That's an inventory bet. That's them saying, "Well,we could keep the shorts around,but we might get stuck with them, so let's take a longer season." That's whyit's always hard to buy gloves in the middle of winter,because they have already moved on to summer. As a retailer, the more you know about what people want,the better you can manage your inventory. That goes back to store pickup. If I know 36 hours in advance that I've sold 17espresso coffee makers,that tells me something about buying patterns. You could probably project that out to how many are going to get picked up in the store and knowhow much inventory. It all becomes data that can let youmanage your products more efficiently.

Shen: Absolutely. Going back for a second tosome of the apparelretailers that got hitwith the crazy warm weather that we saw last year, and we'reseeing a little bit of this year as well -- with DSW, for example.I really wanted to point DSW out because I like thisdescription that management has given for their stores, in the idea that, basically, their stores are justwarehouses or fulfillment centers that happen to open their doors to the public every single day.

Kline: And that's the model Wal-Mart is moving toward, where you'releveraging the fact that you have these giant stores. And sure, you'regoing to get some walk-through traffic. But it's all about what you sell, and having the thing someone wants, when they want it. Amazon actually does thatbetter than anyone, making sure they have in a local fulfillment centers, the razor blades you're going to order,because you ordered them seven weeks ago, and it has analgorithm that shows you're going to order them again on that eighth week.

Shen: Absolutely. In the end, if they can, with the local in-store pickup, avoid theshipping expense, or reroute orders that are shipping from -- one of these DSW stores that haveexcess inventory on hand -- well,they effectively help to clear that inventory out without resorting to some kind ofclearance or markdown and can help preserve some of their profitability.

Kline: Apparel, for DSW, for shoes, for clothes, there's a huge advantage to in-store pickup in that I'mat least going to look at it, if not try it on. There'salways the possibility, if I order from DSW online -- whichmy wife does all the time, andI would say she sends back nine out of 10 pairs,because it's not quite what she wanted, it doesn't quite fit right. If she does the in-store pickup, she has the ability to pick it up, try it on, and give it back.

Shen: Andif it doesn't fit, try on the next size up or down.

Kline: Absolutely. That applies topretty much any product. How disappointing is itwhen you get your new 56-inch televisionand the bezel on it isn'twhat it looked like in the picture,and it's not what you want, so you have to go through the whole trouble ofputting it back in the box and sending it back. Driving people to stores,but also using digital technology, is whatphysical retailers can do that Amazon can't.

Shen: Yeah. Underlying all of this is the idea thata lot of these companies are investing in their technology and their infrastructure to be able to roll outinitiatives like this quickly to adapt, to take that data you mentioned, to evaluate buyer patterns, what's popular, what's selling, what's not, and to be able to keep,maybe, lower inventory products, but hopefully restock that as necessary, if demand seems to be really shooting up -- like you mentioned, back in the day, thoseCabbage Patch dolls.

Thelast topic I want to touch on,it seems to be a little bit controversial, or at least people fall into two different camps here -- whether stores should keep their doors open onThanksgiving versus Black Friday. A lot of companies have jumped into the camp, and they believe thatThanksgiving, for example, just let employees have their day off,spend this time with their families,do whatever it might be, have that time available.Nordstrom, Barnes & Noble, Bed Bath & Beyond, T.J. Maxx, Cabela's, Costco, andREI, which we talked about last year, theygenerated a lot of discussion around this topic, with their #OptOutside marketing. With thenumbers going around, withpeople spending their time at storesduring the traditional Black Friday window, that has shrunk, because,as you mentioned earlier, it's spreading out more. What do you think? What's your take on this whole Thanksgiving, open/not open?

Kline: Theonly companynot making a mistake is REI. REI is a lifestyle brand built aroundactivity and being outside. For them to close and tell you to go take a hike instead is a smart public-relations move.Everybody else is making a mistake, and here's why. Mostconsumers have very little brand loyalty. If I've decidedI'm going to shop on Thanksgiving Day,even thoughI love Barnes & Noble --if I want to buy books and Barnes & Noble is closed and Target is open, I'm going togo to the store that's open. Very few people are waiting to go to their favorite store.

Now,if you're a specialty retailer,if you're selling jewelry or something very unique, OK,you can close your doors. But if you are a mass-merchandise retailer,if you don't open on Thanksgiving,those are sales you're losingthat you're not getting back. And very few stores aregoing to get enough of a public-relations bump to say, "This was a good move." As far as the wholeemployees-getting-a-day-off thing, I worked retail for two years, I ran a giant toy store,and I would have opened on Christmas Day,I would have opened every single day. I used to open Easter alonejust to have the sales. Thereality is, if you work in retail,you are used to working bad hours. You workSundays, weekends, and holidays.Thanksgiving doesn't need to be an exception,because it's your paycheck. If your store is open,it's taking in more money, its bottom line is going to be better, and there's really no reason,unless every retailer closes, for any retailer to close.

Shen: That's an interesting take,and I have to say you make a very good pointwith the idea that, unless you have a brand withincredibly strong loyalty,or some kind of specialty goods, or something along those lines, thatif somebody wants to shop on Thanksgiving,they will simply go where the doors are open, and you lose out on that share of their wallet.

But I do want to say, some people who have argued againstthe idea of keepingyour stores open on Thanksgiving is that,maybe not so much with consumers,in terms of winning them over with that promotion -- maybe REI is doing it right, like you mentioned -- but in terms of company moraleand overall how that plays outwith your various stakeholdersand that public image, the morale of employees, the longer-term,less tangible effect they have --

Kline: Here's the thing,I'll go back to my retail experience --there's a way to manage that. If I ask people --first of all, for holidays, I took volunteers first. Who wants the hours?There are plenty of seasonal employees at all of these places that arejust going to want the hours. Second, I made the day fun for employees. There would be pizza,there might be snacks, there might be sales contests, there might begiveaways.

As a retail manager,it is your jobto make it so that when people have to come inon a day they otherwise wouldn't be coming in, that it's part of the rah-rah, go team. Andmaybe they're getting a bonus day off in the summer. Maybe they're getting entered into a lottery where one in every five employees gets an extra three days off. Whatever it is, there areabsolutely ways to manage morale without making that a negative. You can't ignore that, you'reabsolutely right. Who wants to leave Thanksgivingand have to come in to work? Butsome people do, and others can be incentivized to.

Shen: Fair enough.I think when you are at the scaleof some of these bigger retailers,it definitely makes it much more challengingto get those incentives right. But it's definitely interesting. I'm curious to see how the winds blow in terms of people'spreferences, where the industry takes that. But overall, I think there will always be that die-hardcontingent of stores that have their locations open onThanksgiving Day, maybe sometimes the whole day,maybe sometimes just half the day, but wanting to hit those customers who are eager. Maybeit's a tradition for their family to go out after dinner.

Kline: I won't be anywhere near those stores. There's absolutely nothing you can't buy online that anyone is getting on my list. If you'reon my Christmas list and you want something I can't buy on Amazon, or otherwisedigitally, you are absolutely out of luck.

Shen: Wrapping up here, I would say that,overall, we know, in terms of the financials, that this quarter does have a big impact on the annual results. But I thinkBlack Friday, the title it once held as the officialstart of the holiday shopping season, where you have a four-day weekend, families get started on all their Christmas gifts, for example --I don't think that holds any longer. It really comes down to the fact that companiesand the retail industry overallhas been essentially milking this for so long, andgetting so aggressive in terms of their competition,it's just not as compelling anymore. The fact that you have all these different options, withcompanies that maybe want to offer good discounts year-round, rather than extreme discounts for this four-day period.

Other brands are taking theapproach of spreading out the timing of their promotions so they don't have to compete during this incredibly crazy time for that share of people's spending. But it's diluted in a weekend what I would call the Black Friday brand. But overall, this is always going to be a period for a lot of the companies we follow here on this show in consumer retail,very important to see how they do,in terms of the actual results, but also to seehow they handle what they're pushing outin terms of innovative new ideas,investments in technology, to see how they'retrying to maximize their results from the holiday season. Any last thoughts from you, Dan?

Kline:I've been joking all month that my Halloween costume was dressing as a Black Friday circular, soabsolutely this season has blurred. Andit's important, but we won't know. Everyone on Monday morning will want to handicap this. Wewon't know how this season is going to turn outuntil Jan. 5. This is not a single day anymore. It's almost a six-, seven-week period. If it's a bad Black Friday, or a slow start to the season,it's like baseball, not football. It's 162 games,it's going to be a long holiday selling period,and they can still turn it around.

Shen: All right. Thanks a lot, Dan, for joining me. Good luck,if you're out there at all this weekend.

Kline:Not a chance.

Shen: Ifanybody has any questionsor wants to continue the conversation with us, we would love to hear,for example, what your take is on keeping doors open on Thanksgiving Day, orclosing them for the benefit of employees, and the message behind that. You can hit us up,and the rest of the Industry Focus crew, at Twitter, @MFIndustryFocus. You cansend us any questions or comments via email at industryfocus@fool.com.

Peopleon the program may own companies discussed on the show,and The Motley Fool may have formal recommendations for oragainst stocks mentioned, so don't buy or sell anythingbased solely on what you hear on the program. Thank you for listening, and Fool on!

Daniel Kline has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com and Costco Wholesale. The Motley Fool recommends Bed Bath and Beyond, DSW, and Nordstrom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.