BMO Capital Markets

BMO Capital Markets

November 13, 2013 10:30 ET

BMO Capital Markets: 2013 Retail Holiday Outlook

- Consumer spending expected to grow at a modest 2 per cent through the holiday season

- Lack of blockbuster items weigh on North American toy sales

- Promotional battle expected in the retail apparel space

NEW YORK, NEW YORK and TORONTO, ONTARIO--(Marketwired - Nov. 13, 2013) - With Black Friday and Cyber Monday fast approaching, analysts say the outlook for the busiest shopping days of the year will be challenging for most retailers facing aggressive competition and still-cautious shoppers. BMO Capital Markets' team of experts including economist Sal Guatieri, and analysts covering retail apparel, toys and entertainment sectors, are providing the following comments about what to expect this holiday shopping season:

Sal Guatieri, Senior Economist:

  • Similar to last year, American consumer spending should continue to grow at a modest 2 per cent pace this holiday season.
  • While household finances are much improved from a year ago, amid rising equity and home prices, employment growth remains moderate, unemployment is still elevated and consumer confidence has been undermined by fiscal policy uncertainty.
  • The ongoing housing market recovery will support demand for furnishings and appliances this year. Continued price discounting should put a few smiles into the holiday shopping season.

Gerrick Johnson, Toy Analyst

  • We predict that US toy sales will be down 2 per cent to about $21 billion this year. For the worldwide toy market, which is estimated at about $85 billion, we expect sales growth will range from flat to very low single digits.
  • Toy sales have been weak in North America and mature markets, with the lack of a big hit product, an uncertain economy, and continued popularity of electronic gadgets like smartphones and tablets.
  • There is concern that new video game consoles could steal scarce holiday dollars from the toy category.
  • The girls category looks like it will perform better than the boys category this year. Girls have creative new toys like LEGO Friends or Nerf Rebelle, while boys seem to have tired of LEGO, Nerf, and Spider-Man.
  • Fashion dolls are also doing well, with Monster High driving growth. But expect a competitive segment with new launches like Ever After High, Fairy Tale High, and Equestria Girls.
  • Toys as portals to virtual worlds have been popular. Skylanders, Disney Infinity, and Telepods should enjoy a good season. The arts-and-crafts segments should experience a boost, driven by the popularity of the Rainbow Loom.

John D. Morris, Retail Apparel Analyst

  • The retail apparel holiday shopping season is always promotional - but this year the flood gates are open and we anticipate a promotional battlefield.
  • Weak back-to-school shopping numbers followed by a government shutdown and now cracks in ObamaCare have led to soft mall traffic thus far and high inventories as we head into the holiday season.
  • Our studies indicate a wallet-share shift from apparel to bigger-ticket, non-apparel purchases.
  • The fashion consensus last year centered on a kaleidoscope of color - this comes along once in a decade. This year, we are back to the norm of scattered fashion consensus; shoppers are finding fewer reasons to buy this year versus last, according to our preliminary focus-group research.
  • A record short number of days in the 2013 holiday shopping season (26 shopping days between Thanksgiving and Christmas, the fewest possible days), versus a record long season in 2012 (32 day shopping period last year as Thanksgiving fell on Nov. 22).

Keith Bachman, Entertainment Hardware

  • Apple experiences seasonal strength in the December quarter, due, in part, to new product cycles. Over the past four years, total revenues have increased, on average more than 40 per cent in the December quarter, driven by strength in the iPhone, iPad and iPod.
  • Apple refreshed the iPhone in time for the holidays, with the current lineup including the iPhone 5s and 5c. As a result, iPhone units will peak in the quarter ended December, 2013, and have increased on average nearly 60 per cent q/q over the past four years.
  • Over the past two years, Apple has also refreshed the iPad line, including the mini. The lower price points have made the iPad mini a popular gift for the holidays. For the December quarter, we project total iPad units of 23.2 million, or 65 per cent q/q growth, which compares with the three year average of around 60 per cent q/q growth.
  • The iPod remains a key product for the holidays, despite the secular decline. The December quarter accounts for about 40 per cent of total iPod units in the calendar year.

Edward Williams, Digital Entertainment and e-Commerce

  • Typically the fourth quarter can account for more than 40 per cent of annual revenues and a larger percentage of profitability for interactive entertainment companies.
  • This year not only features the typical seasonality, but also is augmented by the launch of two new consoles, the PlayStation 4 and Xbox One, which will bring about the next wave in console gaming.
  • We expect lower-margin hardware revenue to take up a disproportionate share of overall sales this holiday season within the games industry, but the strong launch of the new consoles would augur well for a robust 2014 for software sales.
  • As we look into 2014 and the next console cycle we expect the publishers to perform well as their margins expand and they introduce some new brands. In particular we believe outperform rated Electronic Arts could be a strong stock.
  • Amazon will continue to experience solid top-line growth (we are modeling 23 per cent growth) in part fueled by more fulfillment centers, more categories, and more markets.

To arrange interviews with BMO Capital Markets' economists and retail analysts regarding their outlook on the 2013 holiday shopping season, please contact Martha McInnis at 212-702-1992.

About BMO Capital Markets

BMO Capital Markets is a leading, full-service North American financial services provider, with more than 2,200 employees operating in 16 North American offices and 29 worldwide, offering corporate, institutional and government clients access to a complete range of investment and corporate banking products and services. BMO Capital Markets is a member of BMO Financial Group (NYSE:BMO)(TSX:BMO), one of the largest diversified financial services providers in North America with CDN$549 billion total assets and more than 46,000 employees as at July 31, 2013.

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