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Strong sales may result in weak profits for retailers this holiday season

So far this holiday season, it seems like economic pundits have been too pessimistic about the holiday shopping season. They worried that stagnant wages and high unemployment would dampen sales. They struggled over how consumers could pack in the same amount of shopping when there are six fewer shopping days between Thanksgiving and Christmas this year.

Yet consumers, whose confidence unexpectedly fell by one measure to seven-month low in November, showed a familiar propensity to buy as the holiday shopping season kicked off in earnest over what's newly known as"Black Weekend" -- the bonanza of discounting during and after Thanksgiving.

For example, in the hot game console category, they snapped up more than 2 million Sony PlayStation 4s in the three weeks since it debuted. Rival Microsoft sold more  than 1 million of its Xbox One units, which retail for about $100 more than the PlayStation 4.

Online sales between Thanksgiving and Cyber Monday grew a brisk 16.5% over the same time period the prior year, setting a new record, according to data from IBM. 

Data from ShopperTrak, which monitors activity in bricks-and-mortar stores, shows that sales at traditional stores during the weekend period rose 1% to $22.2 billion. While the growth may be slower than in previous years, it is still growth, points out Bill Martin, the founder of ShopperTrak, in an interview.

“I think the pessimism is way over baked,” Martin said. "For the past four years, we have had some reasonable growth in the face of some pretty hard-to-swallow news.”

Still, many economists and retail executives are expecting a tough holiday season for retailers by the time the New Year rolls around. Scott Hoyt, an economist with Moody’s,  said he thinks it’s “too soon to tell” how the holiday season might shape up and cautions that the performance on Thanksgiving weekend usually isn’t indicative of the whole season. “It’s dangerous to read too much into this,” he said.

Indeed, even as shopping booms, it remains unclear whether holiday sales will lead to fat holiday profits for retailers. Holiday sales seem to be coming at a steep price.  The average Cyber Monday order value was $128.77, down 1% from last year, according to IBM. That indicates that retailers are ratcheting up their promotions to drive traffic to their stores.

Trendy retailer Urban Outfitters has extended its Cyber Monday sales into Cyber Tuesday, bragging it is “so cyber that it broke the Internet.” Consumer electronics giant Best Buy is offering what it calls “Cyber Week” deals as are Walmart and Target. All of these companies have warned investors in recent weeks that they expected to face a tough holiday season.

“We think there is more discounting this year,” said Chris Christopher, an economist at IHS Global Insight, in an interview, adding that he is a “little more optimistic” about the holidays. But he cautioned, “there is still a long way to go before Christmas.”

According to Christopher, holiday sales will increase 3.2% above last year for a total of $598 billion, the weakest growth since 2009.  That's below the 3.9% gain forecast by the National Retail Federation. Online sales will a be a bright spot, accounting 13.5% of holiday spending this year, up from 12% last year, he said.  Ecommerce, though, accounts for a small  – about 8% -- but growing part of overall retail spending.

Even luxury consumers aren’t in a spending mood.  Milton Pedraza, the founder and chief executive of the market researcher Luxury Institute, said companies that cater to the wealthy are expecting a “good but not great year.” Indeed, even though Tiffany recently posted better-than-expected results and raised its earnings guidance, comparable sales in the Americas only rose 1% in the most recent quarter.

“I see them being very conservative,”  he said in interview, adding many wealthy consumers are worried that the gains in the stock and real estate markets won’t be sustainable. “They are just not spending at the levels that you would expect.”

Conflicting economic data muddies the outlook further. Though the Conference Board’s widely followed consumer sentiment index showed a decline in November, a separate measurement from Bloomberg News called the Bloomberg Consumer Confidence Index showed that optimism was on the rise  “as tensions in Washington calmed and hiring improved.”

 Whether consumer unease dampens spending now that the initial flurry of discounting has cooled and the Dec. 25 shopping deadline looms, will come clear in the next few weeks.

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