How Black Was Friday, Really?

In some places it might have been more appropriate to call it "Bleak Friday," but you wouldn't have read much about that in the mainstream financial press. As it always seems to be with these financial reports, one has to parse the undue optimism out of the headline numbers.

Black Friday was no exception. Most of the articles I read on the subject, as the weekend passed, talked about it being better than last year, when it most definitely was not. What it WAS was a Black Friday with more highly inflated prices than any year ... and sales are measure in prices. So, let's see what Black Friday really revealed about the American consumer.

Too much bubbly in the holiday headlines

Here was the news on CNBC, and it sure sounded like something that would even warm Scrooge's heart during the Holiday season!

"Black Friday online sales top $9 billion in NEW RECORD"

Well, I knew that wouldn't be true. A new record in the middle of a recession that is not a recession? How can that be possible? As a person who clearly thinks through the details or you wouldn't be a Patron to my writing, you probably knew it couldn't be true also, and may have even recognized why; but, first, let's see how the article actually reads because it is typical of most that I read:

Consumers spent a record $9.12 billion online shopping during Black Friday this year, according to Adobe, which tracks sales on retailers' websites.

Overall online sales for the day after Thanksgiving were up 2.3% year over year....

If you are like me, you may have thought, But hold it. When they say sales were up 2.3%, have they factored out inflation? Inflation was up more than 2.3% -- a lot more. And you know they are not going to make that clear for you because they are not going to do the mental work of investigative reporting or even clear factual reporting or because they are publications that want to keep stocks and everything else bubbling up.

Since sales are measured in dollars, not units sold, a perceptive person reading this would realize, Well, if inflation was up more than 8% from a year ago, but sales measured by the prices received were up only 2.3% year-on-year, doesn't that mean actual sales (as in number of items purchased) were down by almost 6%?

Most likely it does, but without more information that's hard to parse out. It may mean people actually bought less, but you don''t know how much prices, themselves, priced inflation out because they were sales prices, and you don't know how those sales compared to last year's sales prices. The problem with the article is that it doesn't let you know whether they already did the math and factored out the inflationary impact when they said sales were up 2.3%, but they do vaguely hint at it:

Many consumers embraced flexible payment plans on Black Friday as they continue to grapple with high prices and inflation.

The devil is the details they left out. One fact that is left out of most of these articles is that, in order to SPEND 2.3% more, consumers had to use flexible payment plans or buy more on their credit cards in order to grapple with inflation. Just looking at the face value of the numbers, it would appear they grappled with inflation not just by using flexible payment plans, but by purchasing roughly 5.7% less STUFF because that is how much the 2.3% rise in overall sales fell short of the 8% rise in overall prices of goods sold. So, it is likely they grappled by tightening their belts, but the article sounds like consumers are feeling assured, so they found a way to spend more than ever. No, they bought 5.7% less and still ended up spending 2.3% more in order to get that much less, and they might have only bought items they know will have to buy this year while they are on sale, not extravagant gifts.

When you sift it out, you can see, "Yes, maybe we ARE in a recession," but few there be that will tell you that either, even after we had a half of year of falling GDP and some seriously questionable numbers used in the last GDP report for inflation. (See "GDP Stands for One “GROSS Domestic Pig," which I'll be updating as I cover the latest BEA revisions to that report in my next article for all readers.) The misreporting of inflation seems to be everywhere, even in the government reports.

The false prophets of false profits

"Ah, well," the profiteers of false facts may say, "What does it matter how much stuff they bought; the stores still made 2.3% more?"

But did they?

No, of course they didn't. Another way consumers grappled was by going to stores that made a big effort to grapple on their behalf. Many stores didn't pass on all of inflation. In fact, they more than discounted it in their sales prices. So, there is a little more to the difference between the roughly 8% inflation rate and the 2.3% increase in sales. It may not have so much that consumers bought 6% less stuff necessary to account for why sales did not even increase by as much as inflation. Many stores set prices lower than their normal inflated prices. So, that makes it hard to find meaning in the numbers when don't have all the details.

There are clues that stores made less for two reasons. Zero Hedge reported (as I'll lay out further down) that profit margins were way down, PLUS profits are measured in inflated dollars that are worth less than they were. That's the double whammy of inflation. Stores dropped their prices in big sales and incentives, making lower profit margins, but what profits they did make are also worth 8.3% less to them than that same amount of money was worth in real buying power a year ago, too.

Another way it matters is that people buying less stuff ultimately will shift down to other people producing less stuff because stores don't want as much inventory going forward when their goal was to reduce inventory, while other people will warehouse and transport less stuff. That will translate to fewer jobs and less income made, turning into even less stuff bought down the road, especially when today's stuff was bought with higher reliance on debt, which brings tomorrow's purchases forward to today. That's the downstream effect -- the inflation spiral. But read the article above, and it sounds like an overall great Thanksgiving sales season.

The CNBC article even went on to say (and to the best I could tell all the financial media slurped the same data up as good news),

For retailers, these numbers may be a promising indicator of the coming weeks.

Well, yeah, "promising" if what you like is to bring in smaller profits than last year that are also worth less than each dollar was worth last year when you, as the retailer, go out to spend your profits on things for yourself.

Other good news after Black Friday was for Cyber Monday:

This year, Cyber Monday is expected to drive $11.2 billion in spending, up 5.1% year-over-year.

That would be great. That would mean only a net decrease of 3.2% in the actual dollar value of those purchases, year-over-year of course. What that actually means to profits if sales measured in dollars are up less than inflation is a little trickier to parse out because you cannot have any clear idea what incentives were given collectively to make those sales. Profits could fall more than the steady-dollar value of sales drops.

In fact, it is quite possible that the unadjusted dollar value of sales went up while the amount of money made in retail went down. It's like the old canard about the sales person who said, "We are losing five cents per sale, but we expect to make it up on volume." You can have all the sales volume in the world, even measured in dollars, and lose more money, the more you sell, if your discounts are deep enough ... and that appears to be what may have happened:

Gone are the days of stimulus checks and strained inventories. Consumers are gloomy, the amount people save versus what they spend has fallen substantially from its early pandemic-era highs, prices for staples like food are rising, and many retailers have stocked up on goods they now need to get off their shelves....

Mastercard Chief Economist Michelle Meyer attributed the high sales totals to “deals that enticed consumers to fill their carts despite the inflationary environment.”

Grid

So far, so good. Retailers made lots of sales -- got the withering consumer cranked up by offering super-low deals on items the consumers need but have not been able to afford lately due to inflation -- but did the retailers make any money?

Wedbush Securities analyst Tom Nikic told clients in a note that two-thirds of the apparel and footwear brands Wedbush tracked had increased their sales compared with last year, and only a seventh had decreased them. “The discounts were pretty widespread, across both apparel and footwear, brands and retailers, athletic and nonathletic,” Nikic said.

So, it took widespread discounts to get these high sales volumes. More to the point,

And profitability has been declining across the retail industry, meaning that aggressive promotions are likely cutting into profits as costs remain high.

So, there you go.

The retailers are seeing inflation in all their operating costs, too, not just in the cost of goods sold, so they don't have room to make much in the way of cuts, but they have a lot of inventory to clear out that they are paying to store that they feared might not sell out due to overstocking everywhere after supply chains broke down. That happened as dealers all pressed during initial shortages to try to avoid further product shortages, but timing got all screwed up in shipping so some items arrived at a time of year when no one wanted them. Others, after prices had climbed to more than people were willing to pay. Some after people flush with cash from stimulus checks had spent their wad ... and so on:

This Black Friday, retailers were operating from a position of weakness. They warned their investors that they had built up high inventories and were starting sales in October, not because shoppers were worried about getting their gifts on time, but because retailers needed to get rid of the inventory they had accumulated.

It wasn’t just that retailers were eager to empty shelves that had been overloaded with inventory over the last several months, as the great pandemic-era buy-off cooled down. It was also a broad awareness that, primarily due to pocketbooks that were tightening to keep up with inflation, customers would be looking for lower costs than usual. The result was major promotions and discounts across the board....

Target’s Vice President of Investor Relations John Hulbert said during an earnings call earlier this month that “consumers are feeling increasing levels of stress, driven by persistently high inflation, rapidly rising interest rates, and an elevated sense of uncertainty about their economic prospects.” That financial anxiety means people are “exhibiting increasing price sensitivity,” Hulbert said, and therefore are “more focused on and responsive to promotions and more hesitant to purchase at full price.”

So, this was not so much a picture of strong consumers or an economy that is still chugging along, as many publications presented, or of business that made bank at the start of the Holiday season. It is, in fact, doubtful that this Black Friday actually landed anywhere close to the day when business anticipate they will cover all their costs for the year and go into the black. Instead, what we saw if you go below the glow of the headlines was businesses with big inventory overhangs selling low -- possibly even at an overall loss on every item to lower their storage costs -- to make room for items that have a better chance of selling during the winter months ahead and to cover, at least, some of their operating costs after recovering (hopefully) all of their cost of goods sold.

Rather than presenting a picture of healthy or resilient consumers, the higher sales in dollars likely represent wary consumers spending more to buy all they could now because, at last, they saw a drop in prices due to steeply discounted sales that, for Black Friday weekend, and in the holiday shopping season around it, dropped back to their normal pre-inflation prices and further because, after all, with inflation up 8%, a 10%-off sale would still be lower than the last year's normal price, and 25% off (a normal sale in normal Holiday shopping seasons) better still. So, you can have a rush of more people buying on credit just so they can stock up on items at or below last year's prices BEFORE they go up more under inflation.

That's what inflation does. It presses people to buy now and stock up for later because they start to figure out the price down the road will only be worse. That should help give meaning of what it's all about when you read the following:

In short, nervous shoppers were looking even more heavily toward sales than usual....

Kohl’s was explicit about concerns that lower-income shoppers may not have the same ability to buy as they had in 2021 or 2020, trumpeting on a November earnings call that “we’re going to have gifts that even start at $35.” The company’s Chief Financial Officer Jill Timm said Kohl’s was “leaning into the fact that we’re bringing in a little bit lower-income customer and how can we make sure that we’re fulfilling their needs across the store.”

Lower income in that wage increases, while strong, have not kept up with inflation. Promotional intensity was widespread, sounding more desperate on the part of retailers this year than last, so I would not take that as a healthy economic sign for the economy. Consumers and retailers were both desperate.

The weeks leading up to Black Friday present a better picture of where we are at, especially when you consider that "Black Friday" started early in the month with advance discounts:

Target’s Minnesota neighbor Best Buy reported similar adversity in its early holiday shopping season results, with year-over-year sales diving 15 percent in the month.

In other words, year-over-year sales going into Black Friday, even as measured in nominal dollars, had been down 15% this past month. It would take a bigger burst than we saw on Black Friday weekend just to make up for many more days that were down 15%, especially when down 15% as measured in nominal (unadjusted for inflation) dollars.

However, the full picture is hard to parse out there, too, because the comparisons are against a prior year that offered very little in the way of promotions due to the stimulus buying, concerns about inventory shortages, etc. Retailers last year were more concerned they might run out of stock than that they would be left holding a lot.

Nikic declared the holiday shopping season so far reported “a big escalation of promotional activity,” (i.e. sales) after “one of the least-promotional Black Friday weeks in recent memory” in 2021....

Wedbush’s Nikic asked, “Were the Black Friday promos successful enough to keep pricing somewhat rational through year-end? Or are we headed for a race to the bottom between now and January?”

To dig deeper into what was happening here, we have to dig into actual profits. For that, I'll turn to some exploration into the numbers by Zero Hedge, which confirms what I have been thinking:

Deeper Than Expected Black Friday Discounts Stoke Retailer Margin Angst

Deeper than expected Black Friday discounts have shifted the focus to profit margins, adding insult to injury to a sector that was already headed into year-end as one of the worst-performers in the S&P 500, with companies such as Target and Best Buy having shocked investors by slashing forecasts in recent weeks....

While the traditional Black Friday scenes of shoppers trampling each other for flatscreen TVs and Playstations were nowhere to be found, online sales set a new record at $9 billion (up from $8.92 billion last year, and $9.03 billion in 2020) due to deeply discounted items ranging from apparel to electronics....

In a nutshell, in-store sales were nothing special, online sales were outstanding, but deep inventory-liquidating discounts - the kind we warned about back in May when discussing the reverse bullwhip effect - aimed at stimulating spending have raised analyst concerns about margins.

Zero Hedge

Goodman Sachs noted that in-store traffic was muted compared to 2019 (to avoid comparisons to Covid years that, as just noted, were bizarre to compare against); but shelves were well-stocked. Major shopping centers saw light traffic, in spite of the deep discounts. Maybe shoppers were not in such a holiday mood after all -- not out and about, dining at restaurants, etc:

https://twitter.com/SteveInmanUIC/status/1596330507390046208?s=20&t=KCBYbgqPRoY34botKDihgg

(Click the "view" link; there is small payoff.)

Where I had been expressing concerns over the past year about shortages, we really saw very few. Still, if you stocked up only on things you regularly consume, you did yourself a favor because you saved yourself some money down the road, and you may have rested a little easier knowing you had just a little abundance to back you up. (My concerns have not changed for the months ahead.)

Zero Hedge had warned there would be a bull-whip effect where the initial shortages we were starting to see would cause retailers to over-react and buy more than they needed to avoid shortages, and that appears to have happened, though it took all the way to this Black Friday for retailers to get aggressive about clearing that overstock out. No retailer wants to pay taxes on inventory as that time of year comes near for many, so now is the time to clear it out since inventory is treated by the IRS somewhat like profits as money in the bank.

At last, one financial magazine does manage to mention inflation as something that needs to be factored into the numbers reported. ZH quoted the following from The Financial Times:

The retail industry expects weaker growth over the course of the peak shopping season, with the National Retail Federation forecasting sales will advance 6-8 per cent during November and December. That would barely keep pace with inflation, which was running at 7.7 per cent in October.

In other words, the increases in sales anticipated for all of November and December combined are expected to fall slightly below the amount that inflation added to those nominal dollar figures.

People will be buying a tiny bit less and paying more for it when sales are off, but retailers may be making a lot less because even those sales that "barely keep pace with inflation" will likely be at far smaller levels of profitability than retailers are used to seeing due to their own rising expenses for labor, energy, etc.. They could even be at losses. (And that 6-8% figure appears to be including online sales.)

The biggest discounts [in online sales] this year were for toys, which averaged 34% off listed prices, while electronics saw discounts peak at 27% according to Friday figures released by Adobe Analytics. Goldman also noted that online promotional activity began earlier in the week, with retailers using various promotional tactics - including targeted discounts and free shipping - to move products.

So, there are all kinds of discounts and costs that retailers absorbed in order to get this small gain in the nominal dollar value of sales. The short of the situation is that online retailers did offer larger discounts this year compared to last year, but last year was also an anomaly in the other direction. If brick-and-mortar traffic between now and Christmas looks like Black Fridays, or actually drops as the Black-Friday promotions end, then these coming weeks could look a little bleak.

To fully break out what happened during this holiday season, you may have to wait until corporate reports break out the numbers in January. Corporations should, however, start to give some advance warnings with revised earnings estimates if the internal numbers are weak, as I think they are. (But, even then, YOU will have to adjust what gets reported in January for inflation; but you should be able to see that profit margins and profits were down and costs likely up.)

The madding media maintains the illusion

I did find one reporter who expresses the same dismay I have about how the mainstream press is ignoring what is really happening beneath their headline numbers -- about how the stories don't square with reality:

“Crowds? I see nothing. I’m surprised,” retail worker Jeremy Pritchett told FOX 2. “Normally, it’s wrapped all the way around the building. Today: no one.”

That’s the typical ground report from areas all over the country. No one, literally almost no one, is doing any holiday shopping and the traditional Black Friday rush to get deals and discounts just didn’t happen. Financial media are scratching their puzzlers, perplexed with furrowed brows.

The Conservative Treehouse

And yet ...

Almost every financial media outlet is using the same Retail Federation talking point about anticipating an 8% increase in holiday sales this year.... [Never mind that ALL of that would just be the effect of inflation.] Pretenses must be maintained. Meanwhile, news crews and camera crews are having a desperate time finding any holiday shopping to use as background footage for the claims that sales are strong.

“Look, over there. There’s a person buying something. Oh, wait, no, that’s just an employee dusting the empty cash register.” At a certain point, one would have to believe reality would run head-first into the mass delusional pretending.

One would think so ... or hope so ... but apparently not. I gave up on that long ago. The mainstream financial media almost completely glossed over the deeper and more-important truths. Where traffic was down, Reuters, for instance, blamed it on rain ... as if we do not always get rain this time of year! Oh my gosh! Rain? Shoppers didn't turn out like usual because the rainy season was just as rainy as usual? Of course, after a year of drought like we just had, one might find rain to be quite unusual this shopping season.

There was an upside: It was easy for people who had to walk from their cars to the store in the rain to find parking close to the store. Lots of parking! None of the usual holiday issues of parking shortages! There's a rosy tint for your glasses.

One regional retailer on the East Coast also noted that most people who were out shopping at his stores were only buying what they need while they could get what they need at sales prices that stripped out the effects of inflation.

The consumer is smart enough to know more inflation is coming. So, even during inflationary times, they'll stock up when the inflation gets temporarily marked back out of the price as happened with some of the items bought ... but you can save even more money doing those purchases online by saving on gas money.

It’s almost Kafkaesque to see how the media are continuing to maintain economic pretenses, yet the reality of a completely collapsed consumer economy is physically staring them in the face.

Here is what I suspect you will see if you do your own research when out and about: Shoppers will be thinner at the malls and shopping centers than is usual for this time of year. Lines will not be as long as normal ... or there will be fewer tills open. Car traffic won't be as bad most days as the Holidays usually are, and parking lots will have more empty spaces than they usually do this time of year. The shelves may look a little less disheveled, too. And the number of fights over the latest hot dolls may be fewer and further between.

Use your own eyes to collect the data, then filter all the numbers you hear by what you see and in line with what you know about how inflation pumps the numbers up, even as it pumps profits out the window.

So, that's some upside for those of you who are like me and hate shopping. Might be a good time for people like us to actually do some ... but only if we have to. Retail outlets are one area in the world that may actually be less of a war zone. There's some Christmas cheer for you : )