The retail story this year is a tale of two halves.
The first half was characterized by markdowns and too much inventory. The second half is expected to bounce back as inventories are right-sized and retailers continue to reap the benefits of their e-commerce investments.
The fourth quarter of 2015 and the first quarter of 2016 were both disappointing, and some investors wonder if retailers’ positive outlook for the second half is wishful thinking borne of desperation. However, there are some economic indicators that support the belief that the back of the year will be an improvement over the first half, as buyers head out to trade shows and plan their purchases.
IHS Economics predicts that gross domestic product growth will accelerate from 1.7 percent in the second quarter to 3.1 percent by year-end. IHS believes that the recent pullback in consumer spending is temporary. The company expects real consumer spending to stay at 3 percent for the remainder of the year, with spending for nondurable goods to rise to 3.1 percent in the third quarter and 2.9 percent in the fourth quarter.
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Households are continuing to enjoy strong employment and income gains. Interest rates continue to remain relatively low — and even if the Federal Reserve does increase rates, it isn’t expected to be much of an increase. Plus, it has been talked about for so long that a rate increase at this point could be anticlimactic.
Consumers can still expect relatively low prices at the gas pump and will continue to enjoy a gas bonus. Oil prices may have started to tick up, but overall are not projected to rise significantly. Last year, crude oil was priced at $61 a barrel. This year, the U.S. Energy Information Administration is projecting oil to be priced at $42 a barrel in the third quarter and hit $44 in the fourth quarter.
Chris Christopher, director of economics at IHS, said, “Real consumer spending for the clothing and footwear category is forecast to rise from $359 billion in the second quarter to $364 billion in the third and then again to $367 billion in the fourth.”
Nominal retail sales for clothing and accessories stores are projected to increase to $64.9 billion in the third quarter and $65.4 billion in the fourth from $64.3 billion in the second quarter. Apparel and shoe stores are projected to rise slightly. He said the only category that is forecast to fall is department stores.
Retailers are ready for these customers to crack open their wallets and start spending again. They have been investing millions of dollars in their direct-to-consumer channels and that growth is expected to continue, although at the expense of department stores. Moody’s analysts said, “Larger apparel companies such as Nike, Ralph Lauren, VF Corp. and PVH have been putting much greater emphasis on growing top-line growth organically through DTC channels, such as new stores and/or online.”
For example, Nike grew its DTC revenues 29 percent in its fiscal third quarter and is expected to grow by midsingle-digit percentages again in its fourth quarter, which ended May 31. VF said its DTC channel was up 8 percent in the first quarter and chief financial officer Scott Roe believes the DTC momentum will continue through the year. IHS’s Christopher said e-commerce sales will come at the expense of restaurant sales as the category gains share.
One problem that has bedeviled retailers this past year is the strong valuation of the dollar. It has wreaked havoc on international shoppers and kept tourists at home, along with affecting the cost of goods sourced in foreign countries. While no one can predict the value of the dollar, it is expected to remain strong versus other currencies for the rest of the year.
Many companies raised prices in order to address the strength of the dollar, but were hurt by hedging transactions to make inventory purchases. Those trades are unwinding, but the price increases remain.
Mike Zuccaro, an analyst at Moody’s Investor Services, said, “Assuming currencies remain largely unchanged over the next 12 months, we see industry profit growth accelerating in 2017, at least in part as companies benefit from increased prices.”