As major retailers wrap up fourth-quarter reports that reflect overall weaker top- and bottom-line results, their top executives are touting turnaround plans that include tightening assortments, cutting staff and refreshing their stores — as well as closing units.
It’s likely good medicine for the market, which is seeing exceptional growth in online sales. The U.S. Census Bureau reported fourth quarter e-commerce sales grew 14.3 percent year over year. In several reports early last year, Antony Karabus, chief executive officer of HRC Retail Advisory, predicted much of what the sector is experiencing now.
Karabus’ analysis showed that the investments made in e-commerce and its variable cost nature (versus fixed-cost structures of operating physical stores) is eating away about 25 percent of pre-tax earnings. That isn’t sustainable, he noted, and retailers will be forced to refurbish stores, close some and put greater emphasis on the in-store experience since 90 percent of sales still occur in a physical store.
But amid these pressures, there are several retailers that appear to be navigating the market well. Two examples are The TJX Cos. Inc., which continues to post robust results and promises further expansion, and Wal-Mart Stores Inc., which is successfully training its shoppers to buy online and pick up in-store. Meanwhile, the outlook on the consumer spending front is looking bright as tax refund-related expenditures seep into the market.
But for now, the news on the consumer front is downbeat even with the soaring stock market. The most recent data for consumer spending, released last week, showed a decline in January, with a drop of 0.3 percent, which was the steepest fall since January 2014. Consumer prices gained 0.4 percent during the month, while wages and salaries were up 0.4 percent — but energy prices rose a hefty 4.2 percent.
Chris G. Christopher, director of consumer economics IHS Markit, said the government’s report “contained good news and not-so-good news.” Christopher said with income, wages and expenditures the results were “relatively positive.”
“However, adjusting for consumer-price increases, the numbers on income and spending are in negative territory,” he noted. “Wages and salaries posted solid gains for the second consecutive month; however, due to a spike in consumer price inflation — especially on the goods and energy fronts — real consumer spending and disposable income landed in the negative.”
Still, Christopher said he’s optimistic as consumer confidence “is at elevated levels and there is considerable momentum on the spending front.” The economist said real consumer spending is poised for growth this month “due to a sudden surge in tax refunds” as well as “elevated levels of consumer mood and strong stock-market performance.”
He went on to note that consumer spending will be an “engine of growth” for the U.S. economy — buoyed by higher levels of employment and disposable income as well as swelling household wealth.
On the manufacturing front, analysts said in a separate report from IHS Markit that indices in the sector are up, with orders and production rising as well as employment, which bodes well for the retail industry. Globally, manufacturing is also seeing a resurgence. “The worm has turned worldwide, and most regions of the globe are at least showing some growth, if not robust growth,” the researchers said.
The brightening picture has potential clouds looming, however, in the ongoing nervousness over potential Trump Administration policies — including a border adjustability tax that retailers claim would send consumer prices soaring — and the upcoming elections in the Netherlands, France and Germany that could ignite further instability in Europe in the wake of Brexit.
Perhaps that is why, despite higher wages in the U.S., the American consumer remains in a frugal mindset. About half of U.S. households continue to live paycheck to paycheck, according to data from Fifth World Bank, and total debt stands at $12.3 trillion — the highest level since 2008. Student debt loads also continue to mount. In the fourth quarter, outstanding student loans rose $31 billion to $1.31 trillion.
It’s this frugality that is helping retailers such as TJX Cos., which recently delivered annual sales that rose 6 percent to $33 billion. The company vowed to expand its store base this year to about 4,000 units. In 2016, it added 198 stores to bring its total to 3,800 units.
Ike Boruchow, senior analyst at Wells Fargo Securities, had a management meeting with TJX executives last week and said in a research note that the “clear message” culled from the session was that “the business continues to gain share in an evolving retail backdrop (share losses from specialty and department stores continue to benefit off-price) and that vendors are not pulling back (overall, [the company continues] to grow the number of brands they sell, and [are] doing more business with existing brands),” he said.