NEW YORK -- The increasing popularity of gift cards is shifting an ever-larger percentage of holiday sales past Christmas into January and even later -- and that's both good and bad news for merchants.
On the plus side, gift cards help stores reduce returns because customers pick out what they want, unlike gift givers who often are guessing what they need. Once in the store, shoppers' total purchases also typically exceed the value of the cards by as much as 15 percent, according to one industry analyst.
Such benefits, however, are offset by the cards' potential to "erase substantial amounts of profits from retailers," according to Todd Slater, director of retail and consumer equity research at Lazard Freres & Co. That's because the recipient of a $100 gift card, for example, might be able to buy two sweaters on sale after Dec. 25, instead of one before Christmas.
That will put even more pressure on margins in a season where a number of mid- to-low-priced stores like Gap Inc.'s Old Navy chain and Sears, Roebuck and Co. have been discounting even more than a year ago.
Retailers have good reason to be concerned. Gift cards are hotter than ever, with an estimated $17.24 billion worth expected to be sold during the holidays -- roughly 8 percent of total sales -- according to the National Retail Federation. Some analysts think that the category could account for 11 percent of the holiday business, based on preliminary reports.
American Express Co.'s gift card sales in November increased fivefold from a year ago after the company began selling them at Rite Aid Corp. and in grocery chains like Winn-Dixie Stores Inc.
Chicago-based General Growth Properties Inc., which operates 220 malls in the country, projects that gift card sales should rise 20 to 25 percent this season from a year ago. And Wal-Mart Stores Inc. reported that gift card sales are up significantly this holiday season from a year ago.
All of that means a final accounting of whether the holiday season was a success or disappointment -- as it now appears -- for retailers is coming later and later each year.
Gift card sales are not booked as revenue until the cards are redeemed. And, with more merchants eliminating fees that erode card values if cards are not used immediately, recipients have little incentive to spend right away.
Greater use of the cards also is forcing retailers to consider stocking less merchandise earlier in the season and increasing the flow of goods in January, Slater said.
Karl Bjornson, a store operations specialist at consulting firm Kurt Salmon Associates, contends the holiday season no longer spans only Thanksgiving to Christmas. "We now have to look at the full month after Christmas to understand the true impact of seasonal sales," he said.
Customers like James McCusker are a key reason. The New Canaan, Conn., resident said he expects to take his time deciding how to spend his gift cards he'll be receiving for Christmas.
"With Christmas, I get enough stuff that you don't need," he said. "I don't want to use a gift card just for the sake of buying more stuff. It is a gift card, and it is supposed to last awhile."
Some stores appear to be getting the message. Federated Department Stores Inc. is expected to increase the flow of fresh spring merchandise to their floors in January, according to analysts. Best Buy Co. said it has made sure to increase its repertoire of video games, DVD movies and digital music in January. Those were the most popular categories when consumers redeemed their gift cards a year ago.
J.C. Penney Co. for the first time will have ads in newspapers nationwide on Sunday reminding customers to redeem their gift cards in an apparent effort to prop up holiday sales.
But identifying the right mix of January products can be tricky, particularly for apparel merchants that sell more season-sensitive goods. Stores could increase shipments of winter items in January, but they have a shorter life to sell the products. Slater said a safer option would be to boost accessories offerings like belts.
Marshal Cohen, senior industry analyst at NPD Group Inc., a market research company based in Port Washington, N.Y., said it is imperative for stores to bring in spring merchandise in January, given such a captive audience that's eager to spend their "free money."
"You don't go to a restaurant for yesterday's food," said Cohen. "Retailers are not putting their best foot forward. Consumers have this new found money and are more likely to be generous, buying merchandise to be used in the future."