December retail, and retailer, results will play on in 2007

Implications: Retail ended strong in 2006. While the amount of increase was higher than the market might have expected, key trends were not terribly surprising, and should be used as an indicator of  what's to come in 2007.


Analysis:
On-line shopping will continue to grow.

Consumers clearly expressed their faith in both retailers and shippers to deliver for the holidays in 2006.  November 1 – December 26th on-line spending was up 26% over 2005. Higher ticket gift items like jewelry and watches, video game software and hardware and consumer electronics drove sales on Amazon.com, Walmart.com, Bestbuy.com and Gamespot.com.

Retailers with a clearly defined brand and market do the best.

Luxury, upscale retailers like Neiman Marcus, Nordstrom, Coach and Tiffany all had strong performance and will continue to outperform. Well-merchandised department stores should continue to enjoy moderate growth. Retailers not well defined, or catering to lower level income consumers (Kmart, Old Navy, Gap, Pier 1) will find sales growth a challenge. Walmart has work to do fixing what has recently been a schizophrenic approach to their marketing and focus.

Consumer Electronics is the “it” category.

Best Buy and Costco both did a superb job with electronics in December. Demand for CE is going to continue to grow, particularly in big-ticket flat panel and HD TV, as well as digital cameras, notebook computers, MP3 players and videogames. LCD TV experienced triple digit growth in December, the other categories  double digit, and, there’s all those gift cards that haven’t even been counted as retail sales yet.  Strong demand for CE will continue in 2007 to the tune of $155 billion.

Based on their popularity, flat panel LCD TVs have now become a staple for Walmart, Costco and Target, while non-traditional stores like Home Depot, Kohls and Toys R Us are also taking a stab at it. Toys R Us now has executives with strong CE experience and connections and could make a go of it particularly at the lower price points.

Incredible value drives incredible demand.

In flat panel (LCD and Plasma) TVs a combination of over supply, a host of new entrants on both the manufacturing and retailing side, and subsequent turf wars for share, the consumer was clearly the winner, and rewarded the LCD category with 109% increase in dollars and 124% in units in December. Holiday 2006 the ASP for a 32” LCD – the top selling size - was just $796 vs. $1354 in 2005. Even in an industry known for eating it’s young, quickly commoditizing technology in the name of holding share, this was an unprecedented and unexpected drop even by those involved. As supply tightens up in the first half prices should stabilize, with more rational year over year price decreases in 2007. But still outstanding value.

Demand for merchandise related to the home will be softer based on a softer housing market.

Hardware sales were down 1.1% in December. While overall retail results and consumer confidence indicate worries about a slumping housing market may be easing, major home improvement spending will lag the rest of retail in the near term. Home Depot and Loews will be working hard to be the ‘retailer of choice’ in their segments.


Bottom line, retail ended the year on a strong note, and consumer confidence is up in January.  There are showing signs of optimism that the Fed is on track to achieve a soft landing for the economy.  And, while no one is yet projecting a banner year for retail overall, the NRF (National Retail Federation) expects US retail sales to increase a very respectable 4.8% in 2007. Focused retailers with strong brands and a good buying experience will be the biggest winners.