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Following on trends laid out during 2023’s first-quarter earnings, the fiscal year’s midway point painted a less-than-positive picture for middle-tier retailers in the US, many whom are struggling to compensate for lower-income consumers’ reallocation of spend to leisure travel, entertainment and eating out — leaving less room for discretionary purchases like clothing and accessories. But it’s not all gloom for American brands, as speciality stores saw a speedier turnaround.
Target’s sales were down 4.9 per cent year-on-year — the first decline the retailer has seen in six years. Shares, however, rose 3 per cent, given investors’ low expectations ahead of the report. Macy’s sales fell 8 per cent year-on-year, while shares fell 14 per cent as the retailer stood by its conservative full-year guidance. Kohl’s sales declined 4.8 per cent year-on-year. Nordstrom sales dropped 8.3 per cent year-on-year, though thanks to a bright spot in Nordstrom Rack, shares rose 6 per cent as the performance beat analyst expectations ($3.66 billion versus $3.61 billion expected) and the retailer maintained its 2023 outlook.
Speciality retailers, on the other hand, saw more positive growth. Abercrombie Fitch Co. shares soared on Wednesday following the company’s earnings report, rising 23 per cent when markets opened — reaching the brand’s highest level in a decade. This was a response to the company beating expectations on 16 per cent sales growth year-on-year and raising its full-year guidance accordingly. “Our second-quarter and first-half results show our playbook is working, and the customer is choosing our brands,” CEO Fran Horowitz told investors.
Urban Outfitters, which owns Urban Outfitters, Free People and Anthropologie, also beat expectations with second-quarter sales up 7.5 per cent year-on-year to $1.27 billion. Gap was a mixed bag; earnings beat analyst expectations, but sales dropped 8 per cent year-on-year to $3.86 billion.
The earnings reflect middle-tier brands’ ability to recapture consumer dollars in a challenging environment in a way that larger retailers have struggled to mimic.
“A deep understanding of our customer allows us to present a compelling assortment to an authentic brand voice and experience,” Abercrombie’s Horowitz told investors on Thursday. “We’re no longer a jeans and T-shirt business. We really have expanded into a lot of new categories. So this young millennial can now wear this brand from work to their weekend getaway.” This, she said, aids customer acquisition and retention. Urban Outfitters CEO Richard Hayne also highlighted fashion newness and effective brand marketing as “pleasing existing customers and capturing additional market share”.
Inflation and cost of living squeezed spending in America as mall retailers and department stores including Abercrombie Fitch, American Eagle, Target and Nordstrom reported sluggish growth in 2022 and set cautious forecasts for the year ahead.
Retailers have less consumer loyalty to lean on. “Generally, brands have much stronger propositions than retailers and the product they sell is often more desirable,” says Neil Saunders, managing director at consultancy Globaldata. “So, although consumers are constrained, they’re more likely to prioritise buying the brands they love.” Nordstrom is, perhaps, the exception: “[Nordstrom] has numerous best-in-class features … and does an excellent job of driving consumer centricity,” investment bank TD Cowen’s earnings update reads.
It’s also a sign of who has been able to keep up with the times. Target CEO Brian Cornell said that consumers’ “negative reaction” to the retailer’s Pride Month merch hurt sales, and defended the company’s decision to remove a selection of pieces from its Pride Month collection in May (while adding that Target would continue to celebrate Pride Month in future).
Inventory levels — thrown into chaos by the pandemic and ensuing supply chain delays — are improving. “Overall, retailers have much better control over inventory this quarter,” Globaldata’s Saunders says. Urban Outfitters inventory was down 16 per cent year-on-year, and Hayne said he believes the company’s improved inventory to sales ratio is a primary driver of its lower markdown rates. Abercrombie’s inventory was also down, finishing the quarter 30 per cent lower than in 2022, enabling better control over promotional activity. Target also improved its inventory position from the year prior, down 17 per cent. Nordstrom’s inventory dropped 17.5 per cent; CEO Erik Nordstrom said the retailer is “focused on managing inventory with greater discipline”, which the retailer believes will add flexibility in the forthcoming holiday season.
TD Cowen said in its earnings update that inventory “improved meaningfully”. The investment bank also highlighted Macy’s inventory agility as a bright spot, noting that this could set the business up for a successful holiday period.
However, just because inventory is down year-on-year doesn’t mean brands and retailers are in optimal positions, Globaldata’s Saunders cautions. “Inventory levels have come down and there is less excess stock. That said, even though year-over-year inventory is down, some retailers still have too much relative to demand.”
The outlook for American retailers remains unsteady. While Abercrombie’s raised guidance is a sign of confidence, others are less sure about what’s to come. Middle-tier brands and retailers are acutely aware of ongoing consumer volatility. Target’s Cornell said the retailer is wary about still-rising interest rates, the forthcoming return of student loan payments and higher-than-usual prices of everyday items. And new Gap CEO Richard Dickson flagged the “choppy consumer market”, noting that Gap’s target customer remains under pressure.
“Almost all the earnings results point to the fact the consumer is slowing down and adjusting their spending habits and buying behaviours,” Globaldata’s Saunders says. “There is a distinct softening in the outlook for the second half. The retail sector is not in recession, but it is in a much more challenging place than it was a year ago.”
As in past quarters, retailers are cautiously optimistic moving into the second half of the year, given this ongoing consumer ambivalence. “It remains to be seen how changes in inflation and higher interest rates will affect discretionary consumer spending in the second half of the year, particularly during the holiday season,” Nordstrom CFO Catherine Smith told investors.
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