Which Stores Will Have Happy Holidays?

Which Stores Will Have Happy Holidays? - It's a Saks or dollar-store Christmas. As the middle class shrinks, retailers catering to the middle (Wal-Mart, Kohl's) may suffer. The extremes (luxury & bargain stores) are set to perform much better. The trends of a struggling middle class and a happy high end will play out in retail stores over the holidays. So where should investors be spending their money?

Don't let the huge Thanksgiving holiday shopping results fool you.

Sure, consumers shelled out a record $52.4 billion, up 16% from last year. But don't take that as a sign that the Christmas season will be bountiful for all.

Here's why.

The encouraging numbers disguise a troubling trend in our economy that isn't letting up. There's a relentless hollowing-out of the middle class that's leaving most consumers at one extreme or the other, in terms of spending power.

In short: This will be a Christmas of haves and have-nots.

Wealthy consumers with money to burn will be snapping up pricey gifts at stores like Nordstrom (JWN +0.15%, news), Saks (SKS +0.21%, news) and Coach (COH -0.78%, news), which should all have a great holiday shopping season. They'll buy the fine jewelry highlighted in the famed Tiffany (TIF +1.88%, news) Christmas window display in Manhattan, which this year features a merry-go-round theme -- complete with zebras and giraffes.

That's fitting, because the growing number of consumers getting bounced out of the middle class by a merry-go-round of monthly bills will be perusing the bargain aisles for toys and clothes for their kids this year. This means stores like Dollar Tree (DLTR -0.37%, news), Dollar General (DG -0.37%, news) and Family Dollar Stores (FDO -0.61%, news) will also do well.

Those retailers catering to the middle -- say, J.C. Penney (JCP +2.36%, news), Kohl's (KSS +0.28%, news) and even Wal-Mart Stores (WMT -0.89%, news) -- may find the season a struggle.

Blame it on the ongoing slump of the U.S middle class.

"The thinning of the middle class is clearly moving forward," says Marshal Cohen, the chief industry analyst with the NPD Group, a market research firm. That view is supported by income numbers we'll get to in a moment. "The luxury retailers are going to have a decent holiday season. The lower-end shopper is going to run out of money very quickly. The consumer hasn't gotten much help from the economy."

In fact, we've seen this trend in the retail numbers all year, with the high end flourishing and the mass market shifting down. There's no reason to expect any change for Christmas. Let's look at the low end first.

Tellingly, not even Wal-Mart is cheap enough anymore for the new budget-conscious consumer. Here's what I mean. Sales at Wal-Mart, once the haven for consumers looking for the lowest prices, were in decline most of this year. They only recently showed any growth at all.

In contrast, sales at low-end stores with "dollar" in their names are booming, with advances of 5% to 6% through most of the year. (That's based on sales at stores open more than a year, the best measure because it strips out the effects of store openings and closings.)

The dollar stores themselves attribute their growth in part to trading down by struggling middle-income consumers. "Our core customer is extremely stressed right now," Family Dollar Stores CEO Howard Levine said in the company's most-recent conference call. "What we've seen is more trade down from that more middle-ish-income customer, which is creating a lot of new customers coming into our stores."

You hear the same story from Dollar Tree. With unemployment stubbornly high, "we have found new customers," CEO Bob Sasser said in his company's most recent conference call. "They are trying to balance their budget. They're looking to us to help them as they search for the things they need every day."

The idea of Christmas shopping at a dollar store might sound pretty sad. But these stores are great merchandisers. No, you won't find an iPad. But you'll find consumers shopping for a wide selection of stuff to save up money for a pricier gift like an iPad, says Susan Yashinsky of Sphere Trending, which analyzes consumer trends.

Here are some of the things consumers might be snatching up as they boost the dollar shops' impressive sales growth:

Regular gifts. These shops will have plenty to offer gift shoppers. Dollar General has broad array of home electronics, toys, kitchen items, home furnishings and beauty products. Dollar Tree has toys, stuffed animals, art supplies, party supplies and candles. Family Dollar offers apparel, home décor and toys. The sweet spot will likely be toys. "Toys is where they will really compete with the mass merchandisers," says Ali Lipson of Mintel, a consumer research firm.

Decorations, wrapping paper and party supplies. One reason dollar stores are so successful is that they are nimble at changing displays to catch seasonal sales trends. Execution is everything in retail, and these stores excel at it, says Howard Davidowitz of Davidowitz & Associates, a retail consulting and investment banking firm. "Decorations is a huge business during the holiday time, and they're in it to win it," agrees Cohen.

Stocking stuffers. Dollar stores are counting on budget-conscious consumers to turn to them for inexpensive knickknacks like candies, small toys and other stuff.

via: msn