Seasonality

A characteristic of data where there exist predictive fluctuations depending on the time of year

What is Seasonality?

Seasonality is a characteristic of data where there exist predictive fluctuations in a data set depending on the time of year. Many different things drive seasonality, and it occurs across various industries.

 

Seasonality

 

One of the prominent industries in which seasonality occurs is the retail industry. There often exists seasonal cycles in consumer habits that may increase during periods like the holiday season. Investors, managers, and consumers who understand the concept of seasonality can capture trends in the market and can better forecast pricing and potential profits.

 

Summary

  • Seasonality is a characteristic of data where there exist predictive fluctuations depending on the time of year.
  • Modeling trends that are associated with seasonality are critical over a wide variety of industries.
  • As a consumer, understanding seasonal trends can help you make cost-saving decisions when making big-ticket item purchases or deciding when to purchase gifts.

 

Why is Seasonality Important?

If you are a consumer trying to get the best bang for your buck, understanding when sales are likely to happen in the different sales cycle for retailers can help you save money on big-ticket item purchases. A simplistic example is understanding that after the holiday season comes Boxing Day.

Many of the same big-ticket items being purchased for the holidays can often be purchased at a discount when waiting just a week. Therefore, some people may choose to do their gift-giving after the traditional holiday, as understanding the seasonal pricing could translate into huge cost savings.

Understanding seasonality is also important for travel and tourists. When planning a vacation somewhere, understanding when the busier season will be and how it may influence both prices in flights, accommodation, and entertainment can help when pre-planning and deciding when to take a vacation.

It also exerts an effect when running a hospitality business and deciding how to forecast staffing and employment requirements. Knowing when to hire seasonal staff to plan for an influx of visitors can make for better budgeting and forecasting and long-term capital allocation.

Hiring seasonal staff can also be a financial benefit for tourism-based companies instead of hiring full-time staff. The concept applies to other sectors as well. The chart below signifies a seasonal sales cycle at a big box retailer:

 

Seasonality Example - Seasonal Sales Cycle

 

Investors and Seasonality

As a savvy investor, one must understand the seasonal nature of stock upticks and downturns. Often, during the fiscal year-end, companies will make a push to increase certain metrics to make the company more alluring to investors. Understanding how earnings season could exert an influence on trading volume and share pricing could make for attractive buying or short selling opportunities.

 

Inventory and Supply Chain Management

Being able to properly forecast and model seasonal trends in retail can have huge implications in supply chain management. Understanding how the production of certain goods must be modified due to seasonal consumer demand can influence the cost of production and how a company organizes its supply chain.

A company can save on investing unnecessarily in large capital projects that may needlessly increase supply if they know they can modify their manufacturing process to be suitable for seasonal demand. If done correctly, it can significantly impact cost savings and profit maximization.

 

Seasonality in the Apparel Industry

Seasonality also plays a critical role in the apparel industry. For example, a company that only produces winter jackets may find it difficult to become profitable in the summer. There would likely be only seasonal demand for their jackets, and they would see a sharp increase in sales in the fall/winter season.

However, by diversifying and introducing complementary product lines that can take advantage of their supply chain – like lighter-weight spring jackets – a winter coat company can utilize their brand presence to be less affected by the seasonal sales cycle.

 

More Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Earnings Season
  • Visible Supply
  • Economic Equilibrium
  • Diversification

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!