We are now a little more than a fortnight away from Christmas Day with TV adverts pushing festive products, high streets adorned with Christmas decorations and shops flush with discount offers.

The so-called ‘Golden Quarter’ including Black Friday is the most hotly contested period of the year amongst retailers and those that suffer disappointing sales or resort to overly-promotional strategies typically disappoint with profit warnings when the festive updates are posted in January. Conversely, shopkeepers with winning customer propositions will trade profitably, grow like-for-like sales and potentially deliver earnings upgrades in the new year.

Christmas alone won’t make or break a retailer. But strong sales over ‘peak’ provide an opportunity to win over customers and secure market share which can be consolidated over ensuing periods, whereas market share losses can tip struggling retailers with weak balance sheets into trouble if they are left with obsolete stock and their cash flows come under strain.

Investors can position themselves ahead of January’s retail reporting frenzy, traditionally kickstarted by sector star turn Next (NXT), by bagging shares in the likely winners ahead of time.

ELF ON THE SHELF – BEAUTY PRODUCTS PURVEYORS TO PROVIDE SOME GLITTER?

The opportunity to glam up for Christmas party season should boost sales at companies beyond the retail sector such as French beauty and cosmetics behemoth L’Oréal (OR:EPA) and its US counterpart Estée Lauder (EL:NYSE).

And Shares sees strong Christmases in store for beneficiaries of the so-called ‘lipstick effect’, the idea that consumers spend more on low-price luxuries during tougher times. Festively-monikered mass market cosmetics brand e.l.f. Beauty (ELF:NYSE) is gobbling up market share, while affordable colour cosmetics supplier Warpaint London (W7L:AIM) should benefit from retailer restocking given strong sell-through this Christmas

BLACK FRIDAY BONANZA

Consumers grappling with cost-of-living pressures were predicted to buy fewer goods this Black Friday given signs that people are buying less stuff and being more wary when parting with their cash.

On 27 November Barclays (BARC) said the volume of UK Black Friday transactions was 0.63% lower compared with 2022 due to the impact of cost-of-living pressures and the trend towards launching discounts earlier in November. A significant risk for retailers is that Black Friday has pulled forward spending which could fall away in the run-up to Christmas and they suffer a bleak start to 2024 as consumers focus on paying credit card bills.

However, the latest consumer confidence survey from GfK suggested that Christmas could still be a winner for shopkeepers, showing a sharp rise in sentiment including a greater willingness to commit to major purchases. GfK’s long-running consumer confidence index rose by six points in November despite ongoing cost-of-living concerns, although it still languishes firmly at minus 24.

In addition, retail analyst MRI Software, previously known as Springboard, said the Black Friday week offered optimism for UK retail destinations with footfall jumping by 7.9% versus the previous week. Meanwhile, German discounter Lidl is expecting a ‘record-breaking Christmas’ trading period, footfall to its stores having surged in the past six weeks as cash-conscious shoppers stocked up on Christmas gifts, decorations and mince pies earlier this year.

WINNERS & LOSERS

For investors, the best strategy is to focus on retailers that are best placed to bag market share, not only during Christmas but into 2024 and beyond. Christmas is a crucial time for supermarkets including Tesco (TSCO) and Sainsbury’s (SBRY), although the grocers won’t feel the benefit of food price inflation this year. It’s also a particularly important period for seasonal specialists with a value focus such as Card Factory (CARD) and The Works (WRKS), while online cards-to-gifts platform Moonpig (MOON) also has a lot riding on the next few weeks.

One large cap retailer with clear momentum and scope for further upgrades is high-flying Marks & Spencer (MKS), whose millions of Sparks customers are able to access festive treats on the app, with food sales remaining strong and the retailer’s more appealing clothing designs are resonating with the public.

At the time of Marks & Spencer’s forecast-smashing first half results on 8 November, CEO Stuart Machin insisted ‘trading momentum has been maintained through October, with customers responding positively to our Christmas ranges’. This upbeat commentary augurs well for sales of everything from festive pyjamas and decorations to Christmas trees, and Machin promised shareholders that ‘all of us will be sleeves rolled up, out in stores and distribution centres, bringing the magic of M&S alive for our customers this Christmas’.

Another likely winner is discounter B&M European Value Retail (BME), the £5.8 billion cap with the ability to seasonally flex its product range, on the basis shoppers on a budget will trade down to its keenly priced toys, Christmas decorations, confectionery and booze. Shares anticipates positive news when B&M issues its third quarter update on 9 January.

At the first half results (9 November), B&M did flag softer UK trading in the opening six weeks of the Golden Quarter, with like-for-like sales growth slowing from 6.2% in the first half to 1.6%. However, Alex Russo-led B&M assured the market that momentum had proved ‘particularly strong in the last three weeks’.

Also set up for the seasonal sales sprint is JD Sports Fashion (JD.), the self-styled ‘king of trainers’ whose core ‘sneakerhead’ consumer, typically a youthful shopper unfettered by mortgage and energy bills, should prioritise spending on that must-have pair of trainers.

One risk to consider is that JD Sports is lapping tough comparatives, having delivered total revenue growth of 20%-plus over the six weeks to 31 December 2022. However, recently raised guidance from US retailers Dick’s Sporting Goods (DKS:NYSE), Hibbett (HIBB:NASDAQ) and Foot Locker (FL:NYSE) offers a positive read-across for JD Sports and instils us with a measure of confidence.

DISCRETIONARY SPEND UNDER PRESSURE

Judging by a profit warning (29 November) from Halfords (HFD) pinned on weak sales of discretionary categories including bicycles, purveyors of big-ticket items are in for a rougher ride this Christmas.

We would expect subdued sales performances from the likes of sofas seller DFS Furniture (DFS) and home improvement duo Kingfisher (KGF) and Wickes (WIX) as cash-strapped consumers put off DIY projects to the new year.

Shifting big ticket furniture may prove challenging for homewares leader Dunelm (DNLM) too, but this high-quality beneficiary of Wilko’s demise should provide comfort and joy for investors as consumers spend on its affordable soft furnishings. The self-styled ‘Home of Homes’ is an ideal destination for hard-pressed shoppers and hard-up university students to load up on everything from decorations and Christmas bedding to festive lights and turkey platters.

Also capable of delivering some festive sparkle is lately unloved technology products purveyor Currys (CURY), a possible beneficiary of robust demand for gadgets ranging from laptops and cameras to headphones to gaming headsets and smart toys. Currys has results for the first half to October 2023 on the slate for 14 December, but investors will have to wait until 18 January for an update on how the retailer performed this Christmas.

Other names gearing up for Christmas are toy and hobby products plays such as fantasy miniatures maker Games Workshop (GAW) and Hornby (HRN:AIM), the small cap behind the eponymous train sets, Scalextric sets and Airfix kits which entered the Christmas period with a bulging order book. ‘Although, like everyone, we are seeing the ramp up into Christmas trade coming later than in previous years,’ said Hornby on 23 November, ‘we are starting to see some encouraging increases in performance.’ Hornby’s sales should also benefit from its recent launch of The WonderWorks in Margate, its first experiential site comprising an exhibit, a large retail space and a café.

WHAT ABOUT THE US BIG BEASTS?

Christmas is enormously important for US retail giants Walmart (WMT:NYSE) and Amazon (AMZN:NASDAQ), which can be relied upon to enhance their market shares this year. However, while the third quarter results season was robust, retailers across the pond are cautious over the outlook for 2024 with pandemic savings draining away and inflation and higher rates finally beginning to hurt US shoppers.

The deteriorating trend was confirmed by the latest profit warning (30 November) from British bootmaker Dr. Martens (DOCS), which bemoaned an ‘increasingly difficult consumer environment’ in the US.

According to Adobe Analytics, US Black Friday online sales came in at $9.8 billion, up 7.5% versus the 2022 numbers, while Cyber Monday spending rose 9.6% year-on-year to reach $12.4 billion, representing the biggest online shopping day of all time.

But a key factor behind the increase was the growth in ‘buy-now, pay-later’ options, which shows consumers are feeling the effects of inflation and higher rates and points to a gloomy 2024 in store.

Shares expects Bentonville-based Walmart, which posted strong third quarter results on (16 November), to lure in price-sensitive shoppers with its cheap groceries, fashion, toys, electronics, and seasonal decorations. Despite its compelling value offering, Brian Cornell-bossed Target (TGT:NYSE) could find the going tougher given its skew towards more discretionary general merchandise.

US shoppers’ desire for a bargain should drive further market gains for off-price retailers including discount apparel-to-home fashions seller TJX Companies (TJX:NYSE), which is nicely positioned as a shopping destination for Christmas gifts, while department store chain Burlington (BURL:NYSE) has positive festive momentum, having delivered (21 November) robust third quarter earnings and comparable store sales as inflation-weary shoppers traded down and boosted takings.

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