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Worried consumers played hard-to-get last month, only loosening their grip on their wallets for essential, fashionable and sale items, and ramping up the promotional pressure on retailers for back-to-school and beyond.
While June comparable-store sales results marked an improvement over previous months, more than half the retailers tracked by Thomson Reuters — 56 percent — missed analysts’ expectations for the month as consumers sat on the sidelines, absorbing negative macroeconomic news, heightened stock market volatility and persistently high unemployment. Meanwhile, retailers that banked on a second-half surge are nervously eyeing rising inventory levels and hoping consumers materialize during the b-t-s season to keep their stocks in check.
Although generally regarded as a disappointment, the month could have been worse if not for a pickup in the final weeks.
“Nobody feels good right now,” said Citi broadlines analyst Deborah Weinswig. “Retailers realize that the back half of the month was driven by weather. A lot of retailers are cutting orders where they can for holiday.
“Back-to-school will be ferociously competitive. Based on my conversations today, retailers are worried,” said Weinswig, who explained there is “a new phenomenon,” namely that companies are “now promoting to gain share.”
In light of such sluggish demand last month, firms began “discounting heavily” to clear out inventory in time for b-t-s shipments, she said, putting margins and profitability at risk.
“What’s most notable is that usually we see retailers adjust their numbers,” she said. Of the 32 retailers tracked by WWD, only four upwardly revised their guidance. American Eagle Outfitters Inc. lowered second-quarter guidance, as did The Wet Seal Inc.
Weinswig said consumers can expect retailers to continue to aggressively promote merchandise in order to drive demand that’s been anemic since the first quarter. Having briefly satiated their need to shop, consumers are back in saving mode, she said.
According to data from the International Council of Shopping Centers, retailers posted a 3 percent year-over-year increase, weaker than most analysts anticipated.
“The June performance was relatively uneven as lower prices and discounting held back the reported pace of spending,” said Michael Niemira, chief economist and director of research for ICSC. “Still, the increase means that, on a fiscal year-to-date basis, total sales grew by 3.8 percent, marking its best performance since 2006.”
But it’s best not to read too much into such minimal gains, said Hana Ben-Shabat, a partner in the retail practice at consulting firm A.T. Kearney.
“There’s something misleading about increases. The problem is, we are nowhere near where we were spending in 2008 and 2007,” she said. “Because of the consumer confidence issue…what we see right now will impact back-to-school and will have some impact on holiday.”
Ben-Shabat, who predicts a flat b-t-s season, noted that after a strong holiday last year, retailers “thought they could see the light at the end of the tunnel,” but “what actually happened was that the economy did not bounce back as expected.”
Still, there were some highlights in June. The fiercely price-focused children’s apparel sector lured customers with robust bargains, while footwear, driven by sales of toning sneakers, continued to thrive. Helped by Father’s Day, men’s apparel also performed well, as did select, differentiated merchandise in women’s apparel. On average, department stores enjoyed a stronger month, and luxury merchants, led by Nordstrom Inc.’s 14.1 percent gain, at least held steady, despite some weak classifications.
“I think people are worried about losing their jobs so they are investing in their wardrobes,” Citi’s Weinswig said, “but big-ticket items like jewelry and furniture fell off a cliff.”
Putting that aside, the analyst said she does not believe the economy is headed for a double-dip recession.
“I think we are so far from that. Everyone’s inventory is so lean. We would have to be back to Armageddon,” she said. “Unemployment would have to be 12 or 13 percent.”
Madison Riley, retail strategist and senior partner at Kurt Salmon Associates, had a more optimistic take on June results and what it portends for retail.
“The trend lines are positive. I think we should be encouraged. [June results] do not change what we see for back-to-school,” he said. “Holiday will be better this year than last primarily because we are against one of the most difficult periods in retail.”
While Riley admitted that “we have a relatively long road back” to full recovery, there are some bright spots.
“There’s a winner in every category,” he said. “That’s another positive sign. You can do well in this economy.”
That sentiment was borne out by results on Wall Street Thursday as firms surpassing expectations tended to be rewarded and those falling short suffered. Overall, the S&P Retail Index was virtually flat, falling less than 0.1 percent to 382.97, as the Dow Jones Industrial Average added another 120.71 points, or 1.2 percent, to close at 10,138.99, its third increase in as many days.
Weakest among comp reporters was The Buckle Inc., with a 7.3 percent decline followed by a 9.8 percent drop in its shares to $28.61, qualifying as the weakest performer among the 172 publicly held firms tracked by WWD. Gap Inc.’s flat performance contributed to a 7.6 percent decline in its shares, to $18.22.
On the other side of the ledger, Abercrombie & Fitch Co.’s unexpectedly strong comp leap of 9 percent helped push its shares up 7.8 percent to $35.45, and J.C. Penney Co. Inc.’s increase of 4.5 percent contributed to its 6.7 percent increase to $6.70. Macy’s Inc. shares were up 3 percent, to $18.44, following its 6.5 percent increase.