November 27, 2018 1:30 PM, EST

Holiday Online Sales Surge, but Profit Margins Concern Retailers

Package warehouse Daniel Carde/Bloomberg News

The initial Black Friday results have reinforced that this U.S. holiday shopping season will be one of the best in recent memory. But even in good times, there are concerns for retailers.

The takeaway from the past few days is that Americans are spending at unprecedented levels, and the overwhelming majority of that growth is online. While brick-and-mortar chains rightfully can claim their stores help boost web sales by giving shoppers a chance to see products in person, the web sales are less profitable.

“Stores have been gaining more traction, but online is growing faster,” Bloomberg analyst Poonam Goyal said. “The higher shipping expenses are still going to be a bigger drag on margin.”

Sales Graph

The shift online means chains have to spend more on already-elevated shipping costs, which will eat into profit margins, she said. On top of this, many retailers now offer free or reduced rates for mailing packages during November and December, which only exacerbates the hit to results.

The added complexity and reduced profitability is hanging over this holiday season that, while expected to be a blockbuster, also is seen as possibly the last standout Christmas of the current economic cycle. Investors started souring on retail stocks earlier this month amid concern that the consumer-spending environment could be at its peak and soon will be followed by decline.

Americans spent $50.6 billion online this month through Nov. 25, a 20% increase from a year ago and spearheaded by a 24% surge to $6.2 billion on Nov. 23 — Black Friday, according to Adobe Analytics. Cyber Monday, Nov. 26, is expected to add another $7.9 billion — a 20% year-over-year gain for that day.

Walmart Package

Bloomberg News

Overall, physical stores had a disappointing four-day period with visits down 6.6%, according to retail analytics firm RetailNext. But not all brick-and-mortar chains and categories are created equal. For example, sales of electronics and appliances rose 6.4% over the weekend, according to Customer Growth Partners. The researcher reiterated its forecast for holiday sales overall to grow 5.1% to $701 billion.

The extra expense of e-commerce comes on top of the industry’s traditional holiday challenge of balancing door-buster deals with profitability. So far, discounting levels appear to be similar to last year, according to Jefferies Financial Group, although price cuts were deeper for some categories such as toys.

“Shoppers and stores alike will have a happy holiday this year — assuming retailers can maintain their margin discipline,” said Craig Johnson, president of Customer Growth Partners. “Looking forward, the key issue is whether this pace can be sustained into the new year and beyond.”