Drug channel may see happier holidays
NEW YORK —Consumers may have a tighter grip on their slimming wallets this holiday season as high energy costs and housing concerns loom overhead, but in the drug store channel the front end could benefit from a stronger flu season and from a consumer who doesn’t mind paying a little more for convenience, according to a preliminary 2007 retail holiday outlook by Lehman Brothers.
“There is a chance we will see some benefit from their convenience as people change their minds about holiday gifts at the last minute and decide to spend more money,” said Lehman Brothers analyst Meredith Adler during the holiday outlook conference call in late September.
In fact, Lehman Brothers estimates that drug stores will see holiday comps of between5.5 percent and 6.5 percent this holiday season, higher than last year’s 4.5 percent.
The 2007 holiday season has 32 shopping days versus 31 days in 2006, which analysts view as a positive as the extra shopping day falls on a Monday. However, analysts warned of monthly sales volatility due to the 53-week calendar shift. This calendar shift causes November to gain a high-volume sales week at the expense of December.
The holiday outlook presentation, featuring more than a half dozen Lehman Brothers analysts, took a macro-level look at the retail landscape, addressing such channels as restaurants, the Internet, retail softlines and department, specialty, dollar and convenience stores, as well as pharmacy retailers.
With seasonal aisles brimming with stocking stuffers, toys, health and beauty baskets and gift-wrap, drug stores typically see their front-end sales climb 10 percent to 20 percent between November and December. The bulk of the sales usually occur late in the season, given how convenient the stores are for last-minute purchases. Adler does not expect this trend to be impacted by a weakening economic environment.
Also helping to drive sales are the significant promotions that usually occur the day after Thanksgiving, such as Walgreens “hot product” sales for six to eight hours on Black Friday, Adler noted.
Will upcoming holidays be bright for retail?The Lehman Brothers Retail Team expects a more modest holiday selling season this year than in 2006, and forecasts same-store sales to increase 2.6 percent versus 2.9 percent in 2006.
| 2007* | 2006 | 2005 | |
| Broadlines/dept. stores | 0.2% | 2.1% | 2.6% |
| Dollar stores | 2-4 | 3 | 2.2 |
| Drug stores | 5.5-6.5 | 4.5 | 6.5 |
| Restaurants | 2-3 | 2.1 | 3.9 |
| Softlines | 0-2 | 2.1 | 8 |
| Specialty | 0-2 | 3.6 | 2.6 |
| Total | 2.6 | 2.9 | 4.3 |
Even though the flu season is always a wild card, Alder said, this year is expected to be more a normal season compared with last year’s weak flu season. If that is the case, it will likely bode well for front end/general merchandise because patients will already be in the stores buying medication and will probably buy other products, as well.
While food retailers do not generate a disproportionate percentage of their annual sales during the holiday season, the sales mix does tend to shift to higher-margin items like perishables and general merchandise.
“Kroger has a bit more exposure because they have their big 153 multi-department stores, basically their version of a supercenter, and 406 jewelry stores and those obviously do very well during the holiday season,” Adler said. “And Safe-way has Blackhawk, its gift card subsidiary. We are expecting Blackhawk to grow very quickly and that has been a focal point for investors, but still only represents about 5 percent of Safeway’s net profit.”
Speaking of gift cards, analyst Bob Drbul said that gift cards will continue to be a popular holiday purchase.
“We estimate about a 25 percent increase in gift card sales this year to about $35 billion,” said Drbul. “We believe the transactions involving gift cards are generally larger than the amount of the gift card’s face value and what we would use is about a 25 percent premium.”