More Retailers Plan to Offer Holiday Free Shipping; Finally Join the 21st Century

This holiday shopping season has already generated intense buzz, primarily due to several retailers making the decision to open their doors to shoppers on Thanksgiving Day. While shoppers are free to voice their own opinions on the issue, what's clear this season is that every retailer will be more aggressive than ever in trying to capture customer dollars. One tactic that retailers will be using is a free shipping option, applicable to orders of any dollar amount.

Most retailers have offered free shipping at some point, but typically require a minimum purchase amount. Amazon (NASDAQ: AMZN) has emerged as a premiere shopping destination, primarily on their wide selection of items and low minimum for free shipping. Thanks to high gas prices and intense crowds, more shoppers than ever are seeking a way to avoid the hassle of going to the mall. Some shoppers have even come to expect free shipping, and only buy from retailers who offer the option.

While standard shipping at many retailers costs anywhere from $5-10 and is a small percentage of what most customers spend during the holiday season, it's the psychological effect that may keep customers away. Once customers taste a good deal such as free shipping, they may not be inclined to pay for it again. Retailers may also benefit, as customers are more likely to make an impulse purchase if they don't have to pay any additional costs to receive the item.

High end retailers Nordstrom (NYSE: JWN) and Saks Fifth Avenue (NYSE: SKS) have also joined the free shipping fray, despite their emphasis on wealthy customers that rarely care about such trivial extra costs. The decision may spur an increase in sales of low cost items that rarely qualify for free shipping, such as leather gloves and winter hats. The move also signals a greater respect for Amazon's product offerings, which now offers luxury goods such as Montblanc pens and Allen Edmonds shoes.

The move will also benefit UPS (NYSE: UPS) and FedEx (NYSE: FDX), as retailers rely more heavily on the shipping services to deliver their goods. As customers have more of their holiday presents delivered, shipping services will experience new revenue opportunities as free shipping options are taken advantage of.

Retailers are beginning to realize that some customers don't want to deal with the hassle of going out to the store. More free shipping options will open doors to customers who may have shunned purchasing their holiday gifts online in the past, and will benefit both retailers and shipping service companies alike.

ACTION ITEMS:

Bullish:
Traders who believe customers will take advantage of free shipping orders to buy more products should consider the following investments:

• Purchase shares or call options in retailers which plan on offering free shipping this holiday season. These retailers will likely get more attention from customers than those that don't offer it.

• Shipping services like UPS and FedEx could be in for very successful holiday seasons. Consider shares and call options in both names.

• In the clothing industry, many customers tend to gravitate towards low and high end names, but tend to avoid ones in the middle. Walmart and Nordstrom may benefit from such a trend, but brands like The Gap could encounter trouble.

Bearish:
Investors who believe that cautious customers will spend less this holiday season will want to consider the following options:

• Short shares or purchase put options of retailers in the hopes of weak earnings reports.

• Lagging holiday sales could also affect shipping service companies. Consider shorting or buying put options in those companies.

• Middle market clothing retailers could struggle given customers tendencies to target low or high end retailers. Consider shorting brands like The Gap.

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