As the holiday shopping season approaches, retail and consumer product companies are facing a challenging environment, according to a new report from S&P Global Ratings. With consumers expected to rein in discretionary spending, retailers will need to sharpen their focus on value and promotions to drive traffic and sales.

S&P forecasts holiday sales growth in the US will slow to around 3 percent in 2024, down from 4.7 percent last year and below the 10-year average of 5.3 percent. "Price actions, as well as modest volume gains given our expectation for a cautious but resilient middle to higher income consumer, support our growth forecast," said Lauren E. Slade, the report's primary author.

The report highlights the diverging fortunes retailers are likely to face this holiday season. "Value perception will separate retailers, and we expect those with the right merchandise at the right price will emerge as winners this holiday season," Slade said.

Discount chains and big box retailers like Walmart and Target are expected to perform well as consumers seek ways to stretch their budgets. "We expect value retailers (such as TJX Cos. Inc.) that cater to the more resilient middle and higher income consumer will fare better due to increased foot traffic from value-conscious consumers," the report stated.

In contrast, sectors with high exposure to discretionary spending, such as department stores, apparel retailers, and specialty stores, are expected to struggle. "We expect other sectors, such as department stores and apparel retailers, will rely on higher discounts to increase traffic and manage inventory," the report said.

The report noted that recent rating actions reflect this divergence, with the negative bias in ratings on retailers with exposure to discretionary spending nearly 1.5 times the negative bias of ratings on retailers exposed to more stable nondiscretionary spending.

This holiday season, a more price-sensitive consumer will prompt retailers to ramp up promotions, further pressuring profit margins. However, the report expects retailers' margins will remain steady due to broad cost-savings initiatives implemented throughout the year.

"Retailers that are exposed to discretionary spending are nearly 1.5x as likely to face a downgrade within the next one to two years than retailers whose sales rely on more stable nondiscretionary spending," the report concluded.

Fashion and consumer product companies will also need to navigate the challenging environment. The report expects demand for apparel, beauty, and household appliances to remain weak, as consumers pull back on discretionary purchases. However, the report is more optimistic on profitability, as companies lap excessive discounts from last year and benefit from more stable inventory levels.

Overall, the report paints a cautious picture for the holiday season, underscoring the need for retailers to focus on value, promotions, and cost management to weather the storm.

“Our outlook is influenced by waning--but persistent--inflation that has pressured household budgets. Additionally, the late Thanksgiving holiday will result in five fewer shopping days than last year, which may weigh on sales. However, a loosening but resilient labor market and further anticipated interest rate cuts support consumer confidence levels. Moreover, many retailers have pulled ahead inventory orders, positioning themselves well for any potential supply-chain disruptions," Ms Slade concluded.