The script has flipped in retail.
The early third-quarter results show that Kohl’s Corp. and J.C. Penney Co. Inc. have finally tapped into a stronger economy, while Macy’s Inc., Nordstrom Inc. and the luxe players are suffering with fewer tourist dollars and a consumer keeping close watch on a sketchy stock market.
But there’s no time for even the retailers on the rise to rest. Both fashion’s haves and have nots are heading into a holiday season that’s expected to be weaker than last year and dominated by a fever of price promotions.
“The backdrop for retail is pretty bad,” said Ike Boruchow, an analyst at Wells Fargo. “You’ve got traffic that’s been declining over the past couple months and has actually gotten really, really bad over the past couple weeks, which is probably a function of how unseasonably warm it is. Markdown cadence across the mall has gotten worse. The inventory is really building. You’re probably going to see a lot of margin issues.”
“But it does seem like through these third-quarter reports, the inventory levels are heading too high for what people thought for the holidays,” said Bob Schulz, managing director at Standard & Poor’s. “So everybody’s going to be promotional. That’s going to be tough for margins.”
The picture will become clearer this week, when retailers as diverse as The TJX Cos. Inc., Wal-Mart Stores Inc., Target Corp., L Brands Inc., Gap Inc. and Abercrombie & Fitch Co. weigh in.
Shulz said off-price giant TJX with its value orientation and its treasure-hunt atmosphere is one of the few companies well-positioned and would be a “bellweather” for comparable-store sales.
The discounters, off-price chains and more middle-market retailers might benefit from the fact that the lower-income consumer seems to be getting a long-promised boost from the economy. U.S. unemployment dropped to 5 percent in October, the lowest level since April 2008 and a boon to job security. Gas prices are also down sharply from a year ago, making it cheaper to get around.
On the upper tier, shoppers are keeping a close eye on the stock market, which caught a serious case of the jitters in August when the yuan was devalued. Retailers with stores in key tourist destinations are also feeling a squeeze as the stronger dollar and trouble in China and Russia keep more spending at home.
When shoppers do decide to spend, they’re driving past the mall to the auto dealership or for dinner.
“Fewer people are going to the store and instead they are spending on cars, houses and restaurants,” said Oliver Chen of Cowan & Co.
October sales results from the Commerce Department Friday bore this out. Sales at restaurants increased 6.6 percent, while cars also jumped 6.6 percent. Normally car sales slow in October, but dealers revved up incentives and a whopping 18 million cars were sold. Plus, people are spending more on their cars, with the average price up 1.4 percent to $34,023.
What money is left over after eating out and buying a new SUV or truck is going to a selective few retail chains.
The ongoing shift toward larger-ticket items was reflected in Friday’s University of Michigan Consumer Sentiment Index, which rose 3.1 points to 93.1. The index is closely watched by the Federal Reserve as a key indicator. Surveys of Consumers chief economist Richard Curtin at the university said confidence rose “mainly due to a stronger outlook for the domestic economy. Overall, the most recent confidence reading was equal to the average during the first 10 months of 2015, and higher than any year since 2004.”
Curtin said two trends dominated the data, with the first being that “consumers anticipated somewhat larger-income increases during the year ahead as well as expected a somewhat lower inflation rate. This meant that consumers held the most favorable inflation-adjusted income expectations since 2007.”
He also said “the somewhat larger gains were anticipated by lower-income households. Buying plans for large discretionary purchases improved, especially for vehicles.” As a result, the economist said the results indicate an expected “rate of growth in personal consumption expenditures of 2.9 percent in 2016.”
Penney’s attributed its strong traffic trends to its Sephora department. The beauty concept brought in a younger demographic and 25 percent of those shoppers cross-shopped, buying items in other categories.
Kohl’s attacked the traffic problem by shrinking its stores and replacing that real estate with grocery stores to drive more traffic next door. It’s also taking a big bet on “Star Wars” merchandise and the anniversary of its loyalty program launch has brought more people into its stores.
On the other hand, Nordstrom did not have traffic in either its full-price stores or its outlets. It wasn’t weather-related because the company’s coat business was strong. Rather, the higher-end consumer seemed to take a big step back in August and stayed back through the rest of the third quarter. The across-the-board weakness drove disappointing profits and a comp-sales gain of just 0.9 percent.
Analysts on a conference call peppered the company’s executives with questions that were clearly aimed at trying to understand the broader retail landscape.
“We’re not economists, we’re merchants,” said Blake Nordstrom, copresident. “You look at the scorecard, there are a number of economic indicators that look real positive for the U.S. in the consumer and spending. All we can tell you is in our business, we saw a slowdown. And it was across the board.”
The key question that has retailers on edge is whether that across-the-board slowdown will stick through the rest of this month and the holiday. They clearly aren’t taking any chances, rolling out aggressive holiday promotions earlier than ever.
And Santa could give retailers at least a New Year’s gift: Economists see the economy improving and believe that eventually will lift retail overall.
“We have a record level of net worth,” said James Smith, chief economist for Parsec Financial Management. “The world is a giant mess, but the U.S. is not. It can’t say down in the aggregate because when you have more people employed than ever before, making more money than ever before, we go shopping. That’s the American way.”