Big Boxes Battle for Holiday Shoppers

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The National Retail Federation is predicting holiday sales growth of 4.1% to $586.1 billion, higher than the 3.5% 10-year average but lower than last year’s 5.6% growth. Big box retailers didn’t have a booming year last holiday season, with a lack of consumer confidence leading to weaker sales. This year, the big boxes are trying to get customers in early….and the plan is working, for some of the stores more than others.

Which store has the mistletoe that will earn the juiciest revenue kiss?

Battle of the Layaways

A common tactic this season is to lure shoppers in with layaway programs, which have returned to popularity as customers become hesitant to buy on credit. Wal-Mart (NYSE: WMT), Sears (NASDAQ: SHLD), and Toys “R” Us are all offering layaway, with the deals sweetened for customers who act early.  

1.  Wal-Mart

The House that Sam Built launched its Christmas layaway program in October last year but it became available on Sept. 16 this year. This is only the second holiday layaway the chain has done since it canceled non-jewelry layaway in 2006.  

The Wal-Mart layaway program covers a broad range of categories including small appliances, toys, and electronics. The electronics includes products like Apple (NASDAQ: AAPL)’s iPad, which will be a big seller for the holiday season. The high prices of Apple products make them a prime candidate for layaway products, making the brand more affordable for the average consumer.

Layaway requires a deposit of 10% or $10 (whichever is greater) and a $15 service fee, which will be refunded at final payment in the form of a Wal-Mart gift card. Minimum item cost is $15 and minimum order total has to be $50. Final payments and pickups must be done by Dec. 14. Cancellation refunds all payments and the deposit but not the service fee.

  • The Pros

You can layaway a freaking iPad.

  • The Cons

Customers could balk at the $15 service fee, which is triple the fee from last year but the 2011 fee also wasn’t refunded at the end. The minimum order requirements could be an issue, but is it really worth the time and effort to layaway an order that costs less than $50?

  • The Fundamentals

Wal-Mart’s namesake locations had a 1.8% decline in same-store sales in 4Q12, which covered the holiday shopping rush. That still was the best quarterly sales increase of that year. The comparable store sales metric has improved in fiscal 2013, with a 2.6% increase in Q1, which ended in late April, and a 2.2% increase in Q2, with the suggestion being that Wal-Mart is bound to have a stronger holiday season this year.

WMT shares are up over 28% YTD and are currently trading near their 52-week high in the mid-$70 range.

2. Sears

Sears has a layaway program available in the namesake stores, Kmart stores, and online. Sears stores are waiving the layaway fee during the oddly specific time periods of Sept. 29 to Oct. 29 and Nov. 2 to Dec. 3. There’s a down payment of $20 or 20% (whichever is greater) and a cancellation fee of $15. Kmart waives the fees from Sept. 9 to Nov. 17.  There’s a down payment of $15 or 10% (whichever is greater) and a cancellation fee of $10.

The programs are both available for most product categories and the layaway can be done in store or online. There’s an option to have even in-store layaway items shipped once payment is complete. There are also a couple of extra incentives, such as mobile payment in-store and member perks, but they’ll likely not attract additional customers.

  • The Pros

There’s not a clear advantage to using Sears’ program rather than Wal-Mart unless you’re buying major tools or appliances that Wal-Mart doesn’t stock.

  • The Cons

See: The Pros. And does anyone really shop at Kmart anymore? Really?

  • The Fundamentals

It’s surprising that Sears isn’t offering a better layaway (or other shopper incentive) program considering it got hammered last holiday season. The eight-week period ending Christmas Day 2011 had a 5.2% decrease in same-store sales. That resulted in an announced closure of 120 stores and a $2.4 billion quarterly charge.

In a rare bit of good news, Sears has announced that it expects nearly $450 million in gross proceeds from the SHOSR offering, which spun-off its Hometown and Outlet stores as a public entity. Shares of the company are trading in the high-$50 range, compared to a 52-week range of $28.89 to $85.90.

3. Toys “R” Us

The private toy emporium recently announced its “Fabulous 15” of top toys and its related “Hot Toy Reservation” program. The Reservation program is fancy talk for layaway but it differs from Wal-Mart in that it only applies to the 50 toys on the hottest toys list. Reservation can happen even if the toy isn’t in-stock at the store when putting down the 20% deposit. Customers can reserve toys up to Halloween and the final payments (and pickup) must be done by Dec. 16.

  • The Pros:

 Reservation program eliminates the risk of a toy being sold out.  

  • The Cons:

This program has a bevy of problems. The layaway is limited to the toys that the store considers “hot,” which might not match what your child wants. Reservations can’t be done online, requiring an in-store trip. Reservations have to be done before Halloween, which is rather early for most shoppers. The large window would give plenty of time for online bargain shopping on a toy your child really wants.

The Wall Street Journal reports that Toys R Us has already had to stop accepting reservations on certain items, such as kid’s tablets and the Wii U, which seems to negate the purpose of the project.

A Tech Slant

Target (NYSE: TGT) is taking the unusual approach of displaying a QR code with its hot toys in-store. QR codes can be scanned with a smartphone app (the store’s official one, in this case) and perform some sort of function, such as directing a customer to a business’s website. In Target’s case, the toy codes will allow parents to covertly complete the online purchase of said toy while the child recipient is present. Shipping on the toys will be free. This service offers a great relief for parents/guardians who can’t find someone to watch a child when it comes time to go shopping.

  • The Pros

Target’s point of difference doesn’t involve price cutting or the potential inconvenience of a layaway program. Busy holiday shoppers may appreciate the chance to shop with kid in tow.

  • The Cons

The program operates on a new system for the store. Tech malfunctions could happen, leading to customer dissatisfaction. There are also a surprising number of smartphone users who have no idea what a QR code is for and those users may be hesitant to shop in such an unfamiliar way.

  • The Fundamentals

Target had to slash prices to stay competitive last year. Its 4Q11 report included a 5.2% drop in earnings and a gross profit margin decline from 28.7% to 28.4%, year-over-year, but it did beat analyst revenue estimates for the quarter.

TGTs share price is up around 27% this year and is currently trading near its 52-week high. Target posts monthly sales results, a practice it plans to stop in FY13. The most recent five-week period (ending Sept. 29) had a 2.1% comparable store sales increase, down from 5.3% year-over-year. That makes for a 4.5% increase year-to-date.  

Final Thoughts

When it comes to big boxes, Wal-Mart and Target stand the best chance, particularly since most locations also feature grocery sections that encourage regularly returning customers. Layaway could give Wal-Mart a significant advantage. Target merchandising chief Kathee Tesija told WSJ last year, “I think Wal-Mart's layaway certainly hurt us in November.” Sears quality product niche is too small to make it a strong contender for the holiday battle.

Best Buy (NYSE: BBY), and similar stores with a tech slant, are more likely than the other big boxes to suffer heavily from the showroom effect of customers checking out the products in-store before going home to order it cheaper online.  The tech-including layaway program at Wal-Mart won’t help matters for that already struggling corner of the retail world.

The NRT sales growth estimate could end up being conservative. Consumer confidence is largely on the upswing this year and the election will be settled before the bulk of holiday shopping kicks off. Big boxes should end up doing better than last year.

LynBetz has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Best Buy. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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