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Record-breaking Black Friday sets up fourth-quarter success after rough week for retail

MarketWatch

By: Tonya Garcia

Black Friday online U.S. sales reached $6.22 billion after a week in which the SPDR S&P Retail ETF fell 3.4%

Despite a rough week for retail stocks, investors have reason to believe that the fourth quarter will be a good one for the sector after what Wells Fargo analysts called a successful Black Friday week.

The SPDR S&P Retail ETF XRT, +1.31% fell 3.4% for the week ending Black Friday, Nov. 23, after falling 4.5% the week prior. Target Corp. shares TGT, +1.86% fell more than 11% on Wednesday and 15.5% for the week, with investments in technology and other areas taking a toll on margins. Other retailers including Walmart Inc. WMT, -0.33% and Kohl’s Corp. KSS, +1.96% fell as well.

However, shoppers were ready to spend, with a record $6.22 billion tallied in U.S. online sales on Black Friday, according to Adobe. E-commerce sales jumped 28% on Thanksgiving Day. ShopperTrak data show that traffic to stores fell just 1.7% on Black Friday. As sales migrate online, experts say a decline in store traffic is to be expected.

The International Council of Shopping Centers says about 151 million people went to a mall or shopping center over the weekend.

The SPDR S&P Retail ETF rose 1.4% in Cyber Monday trading, while the Amplify Online Retail ETF IBUY, +0.82% gained 1.1%.

“At a high level, we believe Black Friday week was a success, one that should give investors a little more confidence as we move deeper into holiday,” wrote Wells Fargo analysts led by Ike Boruchow, who say this was the strongest such week since 2013.

“On top of the solid traffic, what we found to be equally as compelling was a fairly consistent pricing cadence during [Black Friday week],” the note said, adding that pricing was very similar to last year and much better relative to 2016 and 2015.

Heading into Thanksgiving, investors and retailers were encouraged by high consumer confidence, low unemployment and other indicators of a financially strong shopper.

A Moody’s report released Cyber Monday morning says consumer spending will continue to be “robust” during the fourth quarter, with consumption growing in 2019, albeit at a slower pace.

“Employment conditions are likely to remain strong, but buying conditions are turning less favorable because of rising prices and interest rates,” the report said. Spending by lower-income households could decelerate, as rising income has been the key to increases in consumption.

Retailers had also geared up with free shipping, enhanced toy offerings and other bells and whistles to entice shoppers.

The weather helped.

“The entire weekend was the coldest since 2015, while Thanksgiving Day and Black Friday were each the coldest since 2014,” Planalytics, a business weather intelligence firm, wrote in a report. “The cold conditions increased the amount of winter apparel in shoppers’ baskets and also drove demand for hot food and drinks.”

Moreover, shoppers spent without help from discounts, with Wells Fargo writing that promotions were flat to slightly lower than last year.

“This of course lends more credibility that retailers can once again have a successful [fourth quarter] with positive reads into both sales and margins,” Wells Fargo said. “All in, on the heels of declining sentiment and growing fears across the retail space, the traffic/pricing data points coming out of last week’s important holiday selling period are very encouraging in our view.”

Instinet analysts have expressed concern that inventory levels aren’t as favorable as they seem. “Unfortunately, as we’ve been discussing, worse-than-feared inventory forced a flat-to-worse promotional environment this year,” analysts wrote. “[W]e believe Black Friday has gone from a period of management excitement to anguish.”

However, looking forward, Instinet is optimistic about the impact of the trade war with China, as tariffs are set to increase to 25% on Jan. 1.

“The reality is most of our companies, particularly the handbag companies, have been working to reduce China exposure anyway over the past several years in the face of increasing labor,” Instinet wrote. “As such, the impact as it stands today is likely overstated.”

The SPDR S&P Retail ETF has gained 0.6% in 2018, while the Amplify Online Retail ETF has advanced 5%, The S&P 500 index SPX, +1.05% has slipped 0.5% this year, and the Dow Jones Industrial Average DJIA, +0.96% is down 0.8%.

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