- - Thursday, September 30, 2010

ANALYSIS/OPINION:

A few columns ago, we were in the thick of the Back to School shopping season, and as we exit that window of buying, eyes are increasingly looking through to the year-end holiday shopping season. It seems that this bonanza of buying creeps further ahead each year, and the shopping mentality has started to eclipse the Thanksgiving holiday.

That’s not all too surprising from a retailer’s perspective, given how much the Christmas shopping season accounts for their revenue and profits. And with consumers watching their spending while they try to rebuild savings, odds are it’s going to be a challenging retail environment for the balance of the year. As investors and stewards of our own wealth, we have to be careful not to buy into the hype and rosier-than-expected headlines and prognostications.

Case in point: Halloween spending. How big is spending on Halloween? Far bigger than most would imagine, I think. According to the National Retail Federation’s (NRF) 2010 Halloween Consumer Intentions and Actions Survey, conducted by BIGresearch, Americans will spend $66.28 on average this year on Halloween, which is up dramatically from the $56.31 on average in 2009. To put some context around this, the average spent per person in 2008 was $66.54, and in aggregate, the NRF expects Halloween spending to reach $5.8 billion. Yep … $5.8 billion with a “b.”

As one might imagine, the two largest spending categories are candy and costumes. Per the NRF survey, 40 percent will dress up in a costume this year; this is the highest percentage in the survey’s history and is up significantly from 33.4 percent last year. Roughly one-third of the survey recipients will either throw or attend a party, while 72 percent will hand out candy, 50 percent will decorate their home or yard, and as one would expect, there will be much pumpkin carving.

On its face, these findings sound pretty good and candidly they caught me off-guard, given recent housing data, home-foreclosure statistics and more. Digging deeper into the NRF survey, however, revealed that this year’s spending is not quite as sweet as the summary headlines would suggest. Roughly 30 percent of the respondents said that the economy will have an impact on their spending plans, and 86 percent of the respondents indicated they will be spending less, and 45 percent said they will be buying less candy. Watch out Hershey Co., Tootsie Roll Industries, and Cadbury PLC.

Confused?

Well, sifting through the survey results revealed that while people will be buying candy, they will be buying less this year; they will be reusing decorations and costumes from last year or making a costume instead. In other words, more people may be participating in Halloween, but spending will still be restrained.

The other reason why people may be spending more than last year can be attributed to higher prices for candy, costumes and the like, compared with 2009 and 2008. As I talked about recently, raw-material prices have been on the rise this year, and that has likely been passed on in the form of price increases to the consumer.

The larger and, therefore, more important area to watch on spending in the balance of the year will be Christmas shopping. Historically in October, we start to get all sorts of prognostications and forecasts as to how robustly consumers will be spending in the balance of the year as they look to snap up toys, treats, clothes and other gifts for family, friends and loved ones. This year, however, several such forecasts are already out and their message is not all that uplifting.

America’s Research Group’s recently issued its preliminary forecast for holiday spending this year, and it found a record high 43 percent of American shoppers plan to spend less during the last quarter of the year than they did in 2009. By comparison, only 11 percent expect to spend more this holiday season, according to the group’s research.

Looking at this data, one sees a ratio to the tune of -4 to 1, and according to C. Britt Beemer, founder and CEO of America’s Research, this degree of negativity hasn’t been seen in the more than 25 years his company has been conducting the survey. Again, some context: Two years ago during the financial crisis, Mr. Beemer’s poll showed consumers planned to spend less by a ratio of 3-to-1.

It would seem there may not be much holiday cheer this year.

But let’s not get our Grinch out just yet. Forecasts are just that — a forward view that is often updated and refined over the course of time as we get closer to the end point in question. In this case, that would be Halloween spending and year-end Christmas spending. I tend to use forecasts in general to gauge direction and inflection, rather than their numerical finding, which in this case is the forecasted amount spent. I also tend to look at several forecasts, as I find a blend offers a more sober view.

I expect we will be hearing a number of holiday forecasts over the coming weeks, and we will need to delve into these to understand exactly what each is telling us or in some cases trying to sell us. As always, balancing these forecasts against the economic data as well as what we are observing in our daily lives is essential to us as investors.

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