A slowing housing market, a higher interest rate environment and higher fuel costs will likely soften consumer spending in the fourth quarter, but some factoring and financial sources are not fully convinced apparel sales will suffer as a result.
From the vantage point of providing accounts receivable services to vendors who sell to retailers, factors said they see potential hiccups in the short term, but the economic picture is not as gloomy as some media sources report.
“You have so many things that are working at cross currents going into the fourth quarter,” said Stanley Officina, president, Ultimate Financial Solutions LLC. “There’s a certain amount of fear attached to the economy, and the price of gas and oil is certainly going to have an impact.”
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But he pointed out that the impact on spending thus far has not been too great and recent financial figures show that gas prices may have already peaked, and may start to return to more moderate levels. However, that can’t mitigate all the issues investors are concerned about, especially a slowing housing market.
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“Ultimately, I think a lot of these negative factors could start to slow the season. We’re guardedly concerned about the balance of the year,” said Michael Stanley, executive vice president, Rosenthal & Rosenthal.
Consumers are also exhibiting malaise stemming from attitudes regarding the government, war abroad, how the government dealt with Hurricane Katrina and other political issues in an election year, Stanley noted.
Still, while big-ticket items, such as appliances, which are inextricably linked to the housing market, might suffer, apparel is a different kind of purchase. “The market in general is forging ahead with little impact from oil prices and uncertainty in the real estate market. I don’t think the fourth quarter will feel the effects of any of these issues. Clothing is still a small-ticket item relative to these bigger issues, and I think that people need the satisfaction and comfort of buying things for themselves when times are unstable,” said Gary Wassner, president of Hilldun Corp.
Data tracked by Citigroup and released in its U.S. Consumer Update and Market Outlook presentation earlier this month revealed strong wage growth as well as moderating gas prices. While investors remain wary of a slowdown in the housing market, Citigroup’s chief U.S. equity strategist and senior economist, Tobias Levkovich and Steven Weiting, noted in a conference call that consumers would continue to shop. Weiting said the high-end consumer, who obviously has more disposable income, would buoy spending levels.
“If we looked at the components of activity in recent years that have been the most strong, it’s been high-wealth, high-income individuals who have powered spending, you can see it in the performance of certain retailers and you can see it in services outlays,” said Weiting.
The factoring firms said they saw the same trends in the luxury market. “We’ve gotten used to, in the luxury market, the weak dollar and extraordinarily high prices of European products. Yet sales increase each season. Just look at LVMH’s numbers in this country despite the weak dollar,” Wassner pointed out.
“Some of the companies we factor have really taken off nicely on the high-end side….If you have got the right product you’re always going to be going against the tide,” Officina said.
Meanwhile, discount retailers, whose customer base is sensitive to higher fuel costs, are having a more difficult time, said Marc J. Heller, executive vice president, northeast regional manager of CIT Commercial Services.
This dichotomy between luxury retail and discount retail has been playing out in monthly same-store sales results. Department stores catering to high-end consumers consistently outperformed expectations during the past few months.
Recent same-store sales figures also show a slow start to the back-to-school season this year, but some factors note they may have started to rebound in recent weeks, which could affect the outlook for the holiday season.
“Back-to-school started off slower than retailers anticipated. As the weather cooled slightly, I think back-to-school picked up and has been somewhat stronger the last couple of weeks,” Heller said.
“There are some pockets of [the market] doing great, particularly in the junior-teenage segments. We’re going to see some issues relating to the broad spectrum of retailers. I don’t think it’s going to be a disaster, but I certainly don’t think we’re going to beat last year’s results,” Stanley said.
The last two years, holiday spending in the fourth quarter beat expectations. Following strong holiday growth, factors cautioned that a slowdown this year was likely, but that it would just bring spending to a more moderate level. Still, this could be cause for concern for some companies.
“I think there will be a decent holiday season. I don’t think that if people are looking for significant double-digit sales increases or same-store sales increases they are going to see that. But I think they will see some same-store sales increases for the holiday season,” predicted Heller. “I wouldn’t jump up and down and say it’s going to be the best Christmas ever, but unless there’s something that I’m unaware of, I think business will be OK. Retailers and suppliers have reasonably good controls on their inventory levels.”
Other sources agreed, noting any positive gains would be retailer-specific instead of across the board.