Retailers had little reason to expect consumers would be in a spending mood throughout 2005. America’s exit from Iraq has remained beyond the horizon and energy prices skyrocketed through the summer, only to be followed by a hurricane season that devastated New Orleans, the Gulf Coast region and parts of Florida. Despite the media’s crowing over mounting macroeconomic pressures, consumers have shown their appetite for apparel has yet to wane.
American consumers entered 2005 on solid footing. The Conference Board’s Consumer Confidence Index for January came in at 103.4, up from 102.7 in the previous month. Through the first eight months of the year the index fell below 100 only once, in April.
The results were significant given the fact that gas prices, widely considered to have the greatest impact on consumer spending habits, had started a steady ascent in December 2004.
According to the Energy Information Administration, the number-crunching arm of the U.S. Department of Energy, the average price for a gallon of gas in December 2004 was $1.79. By September 2005 gas prices had reached new highs, shooting up 59 percent to an average $2.86 a gallon for the month. Part of this hike was due to the late-August surge caused by Hurricane Katrina striking the Gulf Coast.
Rising fuel prices coupled with almost hysterical media coverage of the subject did surprisingly little to dissuade consumers from exercising their wallets. While not particularly robust, comparable-store sales trended positive across the department, specialty and mass channels during July, August and September. Specialty stores in particular experienced a strong back-to-school season. The 31 specialty stores tracked by WWD posted an average comp gain of 5 percent during September, with Abercrombie & Fitch, American Eagle, Bebe, Chico’s FAS and Wet Seal posting double-digit gains.
“Yes, gas prices are a meaningful drag,” said Michael Niemira, chief economist and director of research at the International Council of Shopping Centers. According to ICSC calculations, for every 10 percent rise in gas prices, sales are negatively impacted by 0.4 percent. Not surprisingly, the rising prices tend to have a greater impact on discount retailers. “Is it huge? No, but it is a factor for some retailers more than others. It’s not the story in and of itself,” said Niemira.
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Consumer confidence gave an indication that consumers’ actions were somewhat out of step with their feelings about the state of the economy. On top of the 5 percent average gain for specialty stores, department store comps tracked by WWD were up an average 1.4 percent for September while mass merchants reported an average 1 percent gain. Still, the Consumer Confidence Index plunged to 86 in September compared with 105 in August. Consumer confidence has regained ground since that time, but has failed to crest the 100 level.
“The sales have certainly held up and there a couple of reasons. It’s not just a confidence measure or an inflation measure,” said Niemira. “Income growth is exceedingly important.”
Steve Spiwak, an economist with market research firm Retail Forward, agreed that the effect of job and income growth has been one of the overlooked stories of the year.
“Household cash flow is much stronger this year than it was last year. That has helped consumers remain immune to all the other factors they faced this year,” said Spiwak.
Like consumer confidence, Retail Forward’s Future Spending Index started the year at a high of 104.9. By May, the index had fallen to 96.6. Gas prices started to sharply increase at the end of May, according to Spiwak. Despite this, the Future Spending Index rose each month to reach 104.6 in September, just as gas prices were cresting due to the effects of Hurricane Katrina. Consumer confidence meanwhile was plummeting.
“A short-term shock dissipates pretty quickly,” said Spiwak.
Retailers got their first look at how quickly concerns were dissipating on Black Friday. Sales and survey results already show apparel and accessories to be a leading gift category for the holiday season. According to an ICSC survey, cash and gift cards are the most wanted holiday gifts this year. Clothing came in third, but well ahead of digital cameras, high-definition TVs, iPods and computer gaming systems.
Retail Forward’s ShopperScape survey found that consumers planned to spend an average of $671 on holiday gifts this year. For households with incomes greater than $75,000 that number rose to $984. Households with incomes between $22,500 and $75,000 planned to spend an average of $573 on gifts while those with incomes less than $22,500 planned to spend $314.
The ShopperScape survey also found that clothing, accessories and shoes were the most popular gift categories across all income levels, with 64 percent of shoppers indicating that they planned to purchase clothing. Again, this was well ahead of video game systems and computer electronics.
And with gas prices now on the decline for more than two months, those following the retail industry believe momentum is gaining.
“Not only has the demand for gasoline dropped considerably since the peak driving season ended in September, but the volume of imports has also increased,” said Dana Telsey, a Bear Stearns analyst, in a research report on Nov. 30. “The combination of these two factors allowed retail gasoline prices to recede in October and November, respectively, giving consumers a bit of a respite from the lofty prices they paid at the pump all summer and plump up their wallets just in time for the holiday shopping season.”
Craig Johnson, president and chief executive officer of Customer Growth Partners in Connecticut, said growth has been fueled through full-price selling.
“Well-run retailers are not resorting to undue levels of discounting if they have great or exclusive merchandise, even in apparel,” he said in a statement on Dec. 1. “You didn’t find Chico’s or Urban Outfitters discounting last week, any more than you found people discounting the Xbox 360.”