Holiday Sales Growth Will Slow

S&P Global Ratings expects holiday sales growth will slow to about 3% in 2024 from 4.7% last year, remaining below the 10-year average of 5.3% (see chart 1). Price actions, as well as modest volume gains given our expectation for a cautious but resilient middle to higher income consumer, support our growth forecast.

Our outlook is influenced by waning--but persistent--inflation that has pressured household budgets. Additionally, the late Thanksgiving holiday will result in five fewer shopping days than last year, which may weigh on sales.

However, a loosening but resilient labor market and further anticipated interest rate cuts support consumer confidence levels. Moreover, many retailers have pulled ahead inventory orders, positioning themselves well for any potential supply-chain disruptions.

Chart 1

Value Perception Will Separate Retailers This Holiday Season

Given expectations for a softer holiday season than in recent years, we anticipate retailers will lean on deals to bring the holiday cheer. We also believe retailers will need to spend more on advertising to offset lower traffic trends and compete for attention.

However, not all sectors will perform equally well. We expect value retailers (such as TJX Cos. Inc.) that cater to the more resilient middle and higher income consumer will fare better due to increased foot traffic from value-conscious consumers. Similarly, Big Box retailers like Walmart Inc. and Target Corp., with their ability to effectively communicate and deliver value to consumers, will also likely perform well as consumers seek ways to stretch their budgets. We expect other sectors, such as department stores and apparel retailers, will rely on higher discounts to increase traffic and manage inventory. Furthermore, soft demand in specialty categories like consumer electronics and home furnishings will also necessitate promotional activity to spark demand. Ultimately, issuers that have the financial flexibility to compete on price and convenience will continue to fare better in our view.

The September retail sales data, which serves as an early indicator of holiday shopping trends, suggests that the 2024 holiday season may be successful if retailers focus on improving their value propositions. Total retail and food services sales were up 1.7% year over year, with e-commerce leading the way as consumers continue to seek convenience and price transparency. However, other retailers with exposure to discretionary categories--such as department stores, furniture and home furnishing stores, and sporting goods stores--continue to struggle; sales decreased year over year (see chart 2). As a result, we expect retailers with heavy exposure to discretionary products will rely on promotions to generate demand. Otherwise, they risk a disappointing holiday season.

Chart 2

Companies Pull Forward Promotional Sales

In October 2024, Amazon.com Inc., Wayfair LLC, Target Corp., and other large retailers launched holiday-themed promotions, dangling discounts on narrow selections of merchandise more than six weeks before Black Friday--one of the biggest shopping days of the year. Amazon reported that its Prime Big Deals Day was the company's biggest early holiday kickoff event ever. In our view, consumers can expect more deal events before Black Friday and Cyber Monday.

Retailers may be trying to pull forward sales as consumers grow more cautious during the weeks leading up to the holiday, particularly during an election year and a shortened holiday shopping window. These steep discounts and big deals also reflect the highly promotional environment this season as value remains front of mind for consumers.

Recent Rating Actions Reflect Weakness In Discretionary Spending

Slowing consumer spending due to tighter household budgets has softened companies' topline growth. This, coupled with the difficulty of absorbing fixed costs, has increased negative rating actions across the U.S. retail portfolio. Additionally, high debt burdens and onerous debt servicing costs for retailers that were part of private-equity buyouts during the pandemic have resulted in constrained operational and financial flexibility. The bulk of the negative rating actions over the last 12 months have been in the apparel, accessories, and specialty subsectors, where exposure to discretionary spending is high (see chart 3).

Chart 3

This holiday season, a more price-sensitive consumer will prompt retailers to promote and discount, further pressuring their profit margins. In the hopes of offsetting the highly promotional retail environment, many retailers announced formal cost-savings initiatives over the last year. Retailers have also adopted a conservative approach to inventory management to support margins. We expect these initiatives and tight inventory management will mostly offset promotional pressures and lead to flat margins for retailers year over year.

Currently, the negative bias in rating outlooks is about 21% in the retail and restaurants portfolio, reflecting 28% of ratings with a negative outlook or on CreditWatch with negative implications, and 7% of ratings with positive outlooks or on CreditWatch with positive implications. The negative bias is typical for the sector due to intense secular pressures. These include competition for consumer spending with technology, health care, auto, housing, and experiences; the costs of shifting business models to meet consumers where and how they want to shop; and price transparency pressuring margins.

However, if we remove restaurants from the portfolio and split the remaining retailers between discretionary and nondiscretionary, the pressure on credit quality in discretionary subsectors such as apparel, specialty, and department stores, is even higher. The negative bias in ratings on retailers with exposure to discretionary spending is nearly 1.5 times the negative bias of ratings on retailers exposed to more stable nondiscretionary spending (see charts 4a and 4b).

Chart 4a

Chart 4b

Slowing Inflation Improves U.S. Consumers' Mood, But Financial Pressures Persist

Retail sales data for September reveals that consumers are ready to spend when the price is right. The Census Bureau reported total retail sales in September increased by 0.4% month over month (seasonally adjusted) and rose by 1.7% year over year.

The Consumer Price Index (CPI) increased 0.2% in September (seasonally adjusted), bringing the annual inflation rate to 2.4%. However, it was 0.1 percentage point lower than in August and is the lowest since February 2021. Moreover, The Michigan Consumer Sentiment Index rose to its highest level in September since April and rose 2.2 points from August's reading to 70.1 (see chart 5).

Chart 5

Nonetheless, the labor market shows clear signs of cooling; real income growth has been running behind real spending growth since the middle of last year; the household savings rate is at a two-year low; and delinquency rates for credit cards and autos are above pre-pandemic levels and still edging higher. As a result, we expect consumers will maintain tight budgets and seek value in the form of promotions as they enter the holiday season.

Our Expectations

Canadian Retailers

Consumer sentiment has also been weak in Canada through 2024, and we expect consumer spending will remain somewhat muted through the holiday season. With macroeconomic headwinds in Canada and high housing costs, Canadian consumers curtailed their discretionary spending through 2024. In our view, the cumulative inflation effect from the past few years will continue to weigh on consumers' purchasing power. Although the Bank of Canada has started cutting interest rates, we expect borrowing costs will remain much higher in the near term compared to the low rates during the COVID-19 pandemic. This is partly due to the mortgage renewal system in Canada.

Given these factors, we forecast consumers will be judicious with their spending habits heading into the holiday season and demand will pick up only gradually. Price conscious and value-focused consumer spending is benefitting Canada's leading dollar store, Dollarama Inc., which we expect will continue to post strong same-store-sales (SSS) growth.

On the other hand, we believe Canadian Tire needs a seasonally strong fourth quarter to improve its credit metrics, given the weak first half of 2024.

We believe grocers will continue to operate in a steady fashion (given their offerings are nondiscretionary products), posting low-single-digit percent SSS growth. This growth is largely fueled by their discount banners and pharmacy operations. Nonetheless, like their U.S. peers, we think Canadian retailers will have to rely on promotions and offers to attract consumers this holiday season.

Consumer Products Companies

The cumulative impact of inflation has led to a pinched consumer and more promotional spending for consumer products companies, including those in sectors most exposed to holiday sales such as apparel manufacturers, beauty, and durables. With fewer supply-chain distractions, many companies have resumed productivity measures such as cost-savings initiatives. We expect they will reinvest these savings into advertising and promotions to increase volumes through the holiday season.

We believe demand for household appliances will likely remain weak because sales were pulled forward during the pandemic and discretionary income remains under pressure. Moreover, high interest rates will continue to constrain high ticket durable purchases, which are tied to housing turnover.

We also expect a cautious consumer will continue to weigh on the toplines of apparel and beauty companies. However, our expectation for margins is more optimistic. Many companies are lapping excessive discounts that occurred during the 2023 holiday season as supply-chain constraints from mid-2022 and low replenishment orders from retailers led to excess inventory levels.

In 2024, new product innovations will be on the shelves for the holiday season, with inventory levels more closely matching demand; this could lead to a better pricing dynamic year over year for consumer products issuers. However, we expect retailers will remain cautious with inventory management, resulting in potentially lower replenishment orders. We also expect consumers will seek value and buy on-promotion items, which will somewhat offset pricing benefits. Nonetheless, we forecast profitability metrics will improve this holiday season relative to last year given lower inflation and stabilizing demand.

Toy Manufacturers

Despite relatively stable results, we expect the toy industry will decline modestly for the full year. According to market research company Circana, overall U.S. toy sales declined 0.4% through the first half of 2024 compared with 2023. However, much of the stability is coming from the building sets super category, which grew 25% and contributed 72% of the total gains year to date, while eight of the 11 super categories declined. Recently, the toy industry, and particularly the building sets category, experienced a boost from adult buyers. According to Circana, through the first quarter of 2024, adults ages 18 and older contributed over $1.5 billion in sales and overtook the three- to five-year-old customer segment. However, we believe these consumers will be more likely to forego purchases amid deteriorating macroeconomic conditions than typical parent toy buyers would be.

Given persistent high prices, we expect consumers will lean toward more well-known brands this holiday season, which we expect will bode well for toy manufacturers Mattel Inc. and Hasbro Inc., which both have extensive toy portfolios containing popular brands. However, we expect increased advertising and a high promotional environment will dampen margins in the fourth quarter.

We believe the toy industry is somewhat resilient to economic slowdowns. Despite persistent inflation and an uncertain macroeconomic environment that includes a shortened holiday shopping season, we continue to believe consumers will reliably purchase toys for their children this holiday season, albeit at modestly lower volumes.

This holiday season will have a big impact on Hasbro given the company's stressed credit metrics for the 'BBB' rating--as indicated by our negative outlook. We could lower the rating if we no longer believe Hasbro can sustain S&P Global Ratings-adjusted debt to EBITDA below 3x and free cash flow to debt above 15%. For Mattel, our outlook is stable, and we expect the company will sustain a good cushion relative to our 2.75x net leverage downgrade threshold through 2025.

Most Exposed Retailers Could See Credit Metrics And Ratings Pressure

Issuers who are more exposed to holiday sales could face additional pressure on credit quality. In the table below, we listed a selection of retailers and apparel manufacturers that generated more than 25% of their annual operating income from holiday sales in the latest fiscal year. Without a jolly holiday season, we could see incremental rating pressure for these retailers.

Table 1