Despite all the political rancor and store closings blanketing the country, there’s hope for retail yet. Just don’t expect fashion to be a major part of it.
The industry appears poised for a decent second half, spurred by first-half increases in employment, wages, the stock market, consumer confidence and favorable weather forecasts. Overall gains are seen in the low single digits, with even a small pickup in apparel predicted by industry experts.
The best retail sectors will be home improvement, home decor, autos, food, off-price apparel and beauty. And the weather will favor fashion retailers because last year’s record warm temperatures stifled sales of seasonal products and are unlikely to be repeated.
“We expect retail growth to accelerate in the second half to 3.8 percent at an annual rate,” compared to an estimated 2.6 percent in the first half of 2017, predicted James Bohnaker, economist, IHS Markit. He said retail will rise 3.7 percent in the third quarter and 3.96 percent in the fourth quarter. Those statistics include all apparel, furniture, electronics, sporting goods, general merchandise, auto, restaurants, gas, food and miscellaneous items.
Excluding food, gas, autos and building materials, retail sales are projected to grow 2 percent at an annual rate in the second half, Bohnaker said. “This is because the weaker retail categories remain apparel and department stores, while spending on food, autos and building materials will do much better.
“That said, apparel and department stores should have a better year than in recent memory due to general improvement in income and optimism, thanks to the strong stock market and job growth,” he added. “There’s a ton of optimism on the part of consumers, particularly since the election, whether it’s because of expectations of tax cuts, stock markets gains, house prices increasing, not to mention the labor market doing incredibly well. Unemployment is 4.4 percent. Pretty much everyone who wants a job has a job. Taking all these factors together, the spending outlook for retail is quite good, though it hasn’t picked up as much as we thought. We expect that to play out a lot in the second half of 2017.”
“From a weather perspective this fall there will be a business-friendly environment,” said Evan Gold, executive vice president, global services, Planalytics, which helps businesses address the impact of the weather. “The core of the opportunity, for things like fleece and gloves, will be early in the season — September, October and November when customers are more sensitive to weather changes.” Cooler weather for back-to-school and the fall should also spur sales of jeans. “Businesses need to look and allocate items appropriately. The weather is not homogeneous throughout the country. They’ve got to look regionally,” cautioned Gold.
Fall 2016 was the second warmest season in 122 years, “basically in recorded history,” Gold said. “For each month from August to October, New York City had monthly average temperatures that were four degrees Fahrenheit warmer than the year before, and as late as Oct. 19, 2016, the city reached a record 86 degrees, at a time when temperatures typically don’t get much above 60.” By November, temperatures cooled down, lifting demand for hats and gloves by 15 percent.
According to research from Cowen & Co., large declines in traffic nationally have overshadowed “consistently better traffic trends at apparel stores,” although they are still negative. In the second week of July, apparel traffic declined 5.26 percent, while electronics traffic fell 26.16 percent, and traffic overall across the country fell 9.67 percent. Year-to-date, apparel traffic has declined 4 percent, while electronics has fallen 19.7 percent.
“We are beginning to see a positive inflection point, even in apparel, which has been struggling,” observed Craig Johnson, president of Customer Growth Partners. “The biggest driver of retail sales is disposable personal income growth, which is growing in the 3-percent-and-change range. There has been decent full-time job growth. For awhile, it was just growth in temporary or part-time jobs.”
But largely due to store closings, there hasn’t been employment growth in retailing, according to government statistics. In the sector overall, there was a loss of about 172,500 jobs in the first half of this year. The nation’s department stores lost about 37,000 jobs and apparel and accessory chains lost about 10,400 jobs.
Not everyone is hopeful for better apparel sales soon. As one retail expert said, “I don’t see any reason why we should have some pickup in business. There’s not a lot of newness out there, or any indication of pent-up demand.”
The nation’s two biggest population segments — the 87 million Millennials and 76 million Baby Boomers cited by the U.S. Census Bureau — aren’t helping much. Baby Boomers are looking ahead and realizing their careers will be coming to an end. “They’re starting to say, ‘I don’t know if I have enough to get by,’ so there’s a tremendous pullback on their spending,” said the retail expert. “There’s also little newness to encourage them to spend and they would rather have a travel experience than buy a new wardrobe or dress up the wardrobe they have.”
Millennials are beginning to have families, putting pressures on them, too. “These two diverse groups really have a dramatic impact — that’s one headwind,” said the executive. “But there’s also a lack of newness, fast fashion is coming at them all the time, and they’re shopping from home more, which keeps them out of the stores. If they were to go to the stores more often, they would likely buy more.”
There will continue to be some bright spots, primarily off-pricers such as T.J. Maxx; beauty chains such as Ulta and Sephora; home decor and home improvement chains such as Home Depot, Williams-Sonoma and HomeGoods; fast fashion such as Zara; and, of course, Amazon. The best-selling categories in fashion will continue to be denim, dresses, beauty, health and wellness, and active apparel, while certain retailers such as Nordstrom are starting to focus more on large sizes.
Food, toys and electronics are also seen as second-half opportunities for department stores such as Kohl’s and J.C. Penney as they spotlight gift assortments. In some cases, changes will come at the expense of apparel space. More than ever, flexibility is key so stores can contract or expand categories quickly based on sales trends.
Also, retailers generally are controlling inventories better so they are more in line with demand and encompass a higher percent of transitional goods. For example, during August and September, retailers typically present darker colors appropriate for fall. However, this year, retail sources said, those darker items will more often be in lighter, summery weights rather than heavier fabrics. Similarly, it’s expected that in January and February there will be the usual preponderance of heavier weights but more often in lighter colors.
On the negative side, footwear, accessories, handbags, much of women’s sportswear, tailored women’s and tailored men’s wear are expected to remain difficult sells. Men’s wear has been slightly stronger than women’s, but consumers have somewhat backed off from men’s, sources said. Traffic continues to decline at malls and department stores, and this year’s avalanche of store closings will have a negative effect on the psyche of consumers, particularly where a mall sees several storefronts going dark.
According to three vendors contacted, store orders have been “flattish” for the second half. “Any plus business would be terrific. In fact, [retailers] will be very happy with a plus one percent gain…As far as taking costs out of the supply chain and product, they’ve done a good job. They’ve taken out all they can.”
According to one accessories vendor: “Retailers are buying scared and making random choices. Planning is becoming obsolete. Orders are flat.”
One major vendor said, “Plans are conservative for the second half. Some retailers, like Kohl’s, will be benefiting from door closures by Macy’s and Penney’s. They’re banking more on active, denim and beauty. If you are TJX, Amazon or Zara, the mood is good. For other retailers, it’s more of a wait-and-see. The buzz right now is ‘speed to market.’”
For the year, Macy’s expects comparable sales on an owned basis to decline between 2.2 percent and 3.3 percent, with comparable sales to decline between 2 and 3 percent. Total sales are expected to be down between 3.2 percent and 4.3 percent in fiscal 2017. Total sales for fiscal 2017 reflect a 53rd week, whereas comparable sales are on a 52-week basis. Nordstrom expects net sales in 2017 to rise 3 to 4 percent while comparable sales will be about flat, while Hudson’s Bay Co. didn’t provide a projection for the year.
Last week the National Retail Federation issued a bullish back-to-school projection, stating sales will reach $83.6 billion, a more than 10 percent increase from last year’s $75.8 billion. The NRF said rising consumer confidence and higher school enrollment will trigger the gains. Categories being measured include clothing, shoes, electronics and school supplies.
“We are looking at a major turning point into July and going forward,” said Jack Kleinhenz, NRF’s chief economist, noting that the country is in its eighth consecutive year of economic expansion. He cited “a bit of a lull in consumer spending earlier in the year, which was puzzling, but the second quarter is a stepping stone for the outlook and is looking stronger than the first quarter.”
Yet according to Johnson at Customer Growth Partners, “Back-to-school is an imperfect predictor of holiday. It doesn’t always mesh up very well, sometimes not even directionally right. In 2009, back-to-school was down, but holiday picked up.”
Asked which stores will do well going forward, Johnson replied, “Those that know their customer, offer sharp value and keep costs in line. Home Depot, Costco are operating on all eight cylinders. TJX and Ross are clearly doing well. Old Navy is OK. Walmart is setting itself up to do well with its jet.com, Moosejaw, Bonobos acquisitions. It’s a much-improved company, both online and stores, and these acquisitions position them better for the future. It signals that management is committed to the apparel category.
“The tricky part is apparel specialty,” Johnson added. “There aren’t many real winners, though American Eagle is doing a little better and Lululemon will accelerate into second half and holiday. Express is having a partial comeback but may not be all the way back in time for Christmas. In department stores, the only one really bubbling along is Nordstrom.”
“Everyone is trying to flex the levers under their control – inventory and expenses,” observed Nomura retail analyst Simeon Siegel. “Retailers are trying to be very tight on inventory. The department store channel has made that very clear. They’re going after jewelry and cosmetics, promotionally. The question becomes, does that matter? In this world where fashion is incredibly fickle and lead times are shrinking by the day, it’s hard to say what’s going to work for holiday. The one thing we can bank on is that consumers know they have control. That means price will matter. Weaning customers off promotion is very difficult. This will be another holiday full of discounts.”