What retailers need to see for a merry Christmas

A slow start of holiday sales will mean more discounting, smaller margins

a woman

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In a little more than two months Christmas will be upon us, but well before then retailers have had to put in their inventory orders and estimate what holiday season sales can be expected. Last year, sales were down, and being the busiest part of the business year, it is crucial to get the inventory level right, or heavy discounting will be needed to clear it.

Economic sentiment has been improving, but will it be enough to get shoppers to spend more? Concerns that the private sector services industry is not going to be able to take the place of the mining industry is backed up by the below average GDP growth, though it is slowly rising. Coupled with sentiment about job insecurity, consumers may still try to save a fair amount this year even if they also open the purse strings a little wider.

Retailers want an early start to lengthen the shopping season.  They will be testing customer demand, so any sales reports and updates that are publicly released will be important for you as an investor to read so that you know what to expect from these stocks.

Major retailers Harvey Norman (ASX: HVN) and JB Hi-Fi (ASX: JBH) have both rose in share price for most of the year, buoyed by expectations in a revived housing market. Harvey Norman is at a price-earnings (PE) ratio of 16, higher than its 12 average over the past five years. JB Hi-Fi is at 18.17, slightly above but more in line with previous years.

Department store retailers David Jones (ASX: DJS) and Myer Holdings (ASX: MYR) have both had see-saw years in share price, coming down from recent highs in March, and working their way back up since June. They both have been struggling with lower store foot traffic, and have tried to offset sagging instore sales by developing multichannel online retailing and creating dedicated distribution centres for these sales.

Foolish takeaway

In the highly competitive world of retailing, pricing is king, and if weak sales lead the season, then discounting will make for thin margins this Christmas. They will also have to contend with rival pure online retailers taking sales at the edge.

As investments, these four already have the season's gains priced into them. If it is hard for these professionals to read their own markets, then to make up for the uncertainty, you have to have a fairly big margin of safety built into the share price. When sales don't end up matching the expectations, the share price will come down, and that would be a better time to consider which to buy.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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