Red flags for holiday 2022 are being raised.
Consumer spending slowed sharply in July; fears that the U.S. will enter into a recession are mounting; Nike and VF Corp. are citing big inventory buildups meaning massive promotions in the near-term, and Macy’s, Nordstrom and Kohl’s in their second-quarter reports reduced forecasts for the year. Further guidance cuts through the industry could be seen in third-quarter reports.
On Monday, Cowen & Co. gave a dim assessment of the state of retailing and the upcoming holiday season.
“There are record high levels of inventory across the sector with demand slowing. Consensus gross margin expectations into 2023 are too high as markdown allowances rise, storage costs rise, higher-cost inventory flows onto income statements, and foreign exchange transactional pressure is rising,” Cowen reported. “Inventory continues to expand through a mix of cost inflation and unit growth.”
Cowen sees the marketplace as “fragile,” adding, “Holiday 2022 is shaping up to be a very different dynamic than 2021 given a multitude of macro pressures that are likely to negatively impact the level of holiday consumer spending versus prior years along with heightened inventory levels across the sector which have begun to trigger a ramp in promotional markdowns.”
Heightening the promotional atmosphere, Amazon has added a second Prime Day this year, called Prime Early Access, which is set for Oct. 11 and 12. It’s bound to get consumers shopping early for Christmas gifts and will help brands and retailers clear merchandise. Some consumers already got a jump on their gift shopping, taking advantage of Amazon Prime Day last July and initial back-to-school promotions.
“The economic situation in the United States is unsettling,” National Retail Federation chief economist Jack Kleinhenz indicated Monday in the October issue of NRF’s Monthly Economic Review. “Consumer confidence is down, consumer spending’s rate of growth has slowed, and economists and consumers alike are worried about the possibility of a recession, all reflecting persistently high inflation and rising interest rates. Nonetheless, spending continues to grow, and many economists say a recession – if there is one – will likely be mild.”
“Consumers have become cautious – but they have not stopped spending,” Kleinhenz said. “Growth is not as high as last year, but households continue to spend each month as more jobs, wage growth and savings backstop their finances and help them confront higher prices.”
Cowen is forecasting nominal holiday 2022 sales in the U.S. up 6.5 percent, but considering inflation of about 6 percent, “real” retail sales growth will come in only 0.5 percent ahead. Cowen’s projections exclude food and gas.
Meanwhile, Deloitte is forecasting 4 to 6 percent growth in U.S. holiday retail sales to $1.45 trillion to $1.47 trillion for the November 2022 through January 2023 time period, down from the firm’s 7 to 9 percent forecast for 2021. For holiday e-commerce sales alone, Deloitte is projecting 12.8 to 14.3 percent year-over-year growth to $260 billion to $264 billion, which Cowen said is “a tighter range” than was forecast for 2021 of 11 to 15 percent.
Bain & Co. has forecast 7.5 percent nominal growth in holiday sales.
In 2021, U.S. retail sales rose 14.1 percent from Nov. 1 to Dec. 31, according to the National Retail Federation.
Cowen surveyed 2,500 consumers in August and found that social events, travel and apparel are the top three areas where they anticipate spending a smaller share of their wallets. Consequently, “We see downside risk to the industry’s holiday sales projections and plans,” Cowen reported.
Cowen is “cautious” on third- and fourth-quarter guidance for several companies including Under Armour, Burlington, Adidas, Allbirds, Hanes, Puma, PVH Corp., Sketchers and Figs. But Cowen remains positive on Lululemon, Deckers, the TJX Cos. Inc. and Dick’s Sporting Goods.
In other observations, Cowen wrote:
- E-commerce traffic is broadly moderating across the consumer ecosystem and within softlines retail.
- Customer acquisition and retention costs are rising on search and social commerce.
- Cowen continues to see promotions increasing over search engines and social platforms.
- Through the first half of 2022 the savings rate has fallen to 5 percent, or below pre-pandemic levels.
“We are still in the early stages of shifts back to services and that discretionary goods could suffer as the economy slows amid rising interest rates and challenging consumer spending compares,” Cowen reported.
But it’s not all bad, as Cowen indicates that freight, fuel and certain raw materials such as cotton have experienced “a deflationary trend of recent as U.S. consumer demand is slowing, providing prospects for the development of future margin relief for retail and consumer brands at some point beginning in fiscal-year 2023 but likely not before the second half of fiscal-year ’23.”
Shipping rates on containers moving from Shanghai to Los Angeles dipped below $4,000 to $3,779 in the most recent week for the first time since Sept. 17, 2020 and rates are down about 70 percent from the Sept. 16, 2021 peak, Cowen noted.
On the other hand, the war in Ukraine, China’s “zero tolerance” COVID-19 policy and tensions with Taiwan, and changes to fiscal and monetary policy in North America and Europe are “likely to keep volatility high across financial markets, which will feed back to consumer sentiment and behavior. It is challenging to see resolutions to many of these issues in the near future.”