The second-quarter rubber is about to meet the road — and the evidence-to-date suggests the fashion industry will just be puttering along.
July comparable-store sales were better than expected last week, but offered only a narrow take on the industry and no window into how promotional retailers had to be to drive traffic. For every encouraging increase, there seemed to be a decline not far away. Gap Inc.’s resurgence with a 10 percent comp gain in July was countered by Abercrombie & Fitch Co.’s profit warning and decision to pull back on its international expansion.
The economy is also sending a confusing array of signals. Consumer confidence perked up in July and the Labor Department said the U.S. added 163,000 jobs for the month. But unemployment, read in a different survey, ticked up to 8.3 percent and the Ben S. Bernanke-led Federal Reserve has indicated that the economy is weak enough to have the U.S. central bank standing by and ready to step in to save it.
“Traffic trends are not fabulous, e-commerce is probably doing OK for the most part, but in the aggregate, things are not flying off the shelves,” said Marie Driscoll, an independent retail consultant who previously covered stocks at Standard & Poor’s. “I don’t think anybody’s really [hitting] it out of the park here.”
Driscoll said volatility in the stock market is weighing on the luxury consumer, while farther down the price scale the companies that are doing well are taking share from their competitors, particularly J.C. Penney Co. Inc., which is reimagining its layout and business.
Macy’s Inc., which kicks off the second-quarter reporting season on Wednesday, is one of those taking share from Penney’s. Analysts expect the department store’s earnings per share to rise to 64 cents from 55 cents a year earlier. Macy’s is also seen as doing a lot of things right — building its e-commerce business, focusing on local markets, trying to figure out younger consumers. That, along with the give-and-take with Penney’s, suggests Macy’s is benefiting from its own situation, rather than a boost from a robust retail landscape.
Of the 21 fashion companies reporting earnings over the next two weeks, analysts project that 10 will log better adjusted EPS, while 10 will show weaker results. Buckle Inc., which was a standout performer until recently, is expected to post flat profits. EPS can also be inflated by share buyback programs, which companies sometimes use to keep investors interested during slow patches.
“Clearly we’re entering the second half of the year on a weaker note than in the first half. We came out of the gate really strongly [at the start of 2012],” said Craig Johnson, president of Customer Growth Partners.
Johnson cut his estimate for back-to-school sales gains to 3.4 percent from 3.9 percent, looking at July, August and September combined. Either way, that’s a big slowdown from last year’s 6.7 percent jump.
Second-quarter earnings will show just how much retailers cut prices to move goods. “A lot of people were pulling out the stops as the quarter wrapped to even get the level of sales they did,” Johnson said.
Matt Katz, a leader in The Boston Consulting Group’s retail practice, said the companies that are doing well are those that took their medicine during the downturn by cutting inventories and costs and positioning themselves to react quickly to trends.
“I don’t think anyone’s going to go out and make a big bet, but I think companies are going to make [smaller] bets on how they interpret fashion and have to be in a position to chase it.”
Just as stores have learned how to live in leaner, more uncertain times, consumers might also be getting the knack of coexisting with so many bad headlines.
“Consumers are getting used to carrying the euro and Greece and Spain on their shoulders and worrying that the Democrats and the Republicans are not going to be able to come together for a federal debt increase,” said Mike Moriarty, a partner in A.T. Kearney. “The American consumer and the consumer around the world has said, ‘You know what? I can deal with this. This is not the end of the world, it’s the way the world works.’”