Wall Street is concerned about what retailers will reveal in their third-quarter earnings reports.
“Following a decent [back-to-school] season, we believe demand for our group has deteriorated, which could be attributable to numerous headwinds,” Wells Fargo retail analysts wrote last week in a report led by Ike Boruchow. They cited rising energy prices, student loan payments, and unfavorable weather as some reasons why consumers aren’t spending as much on apparel and accessories.
“As a result, investors are now very cautious entering 3Q with risk of negative revisions growing. While inventory is tight, concerns around markdowns into holiday will grow should demand weaken further,” they wrote.
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Softlines analyst John Kernan said that TD Cowen’s proprietary data found slowing digital trends at Nike, Skechers and Academy Sports. He sees the potential for risk to fourth quarter guidance and consensus estimates on the weakening data for companies including Columbia Sportswear, VF, Puma, and Allbirds.
In fact, trends “deteriorated across most softlines, department stores and large e-com platforms,” Kernan said, noting that discretionary spending is “slowing” across softlines. He added that cost pressures are building across the supply chain for free on board, factory labor and shipping costs. Further, labor pressures and rising retail crime and shrink continue to pressure margins.
UBS analyst Jay Sole, who last month warned of a “coming slowdown” in soft goods spending, on Monday reiterated his bearish outlook as new UBS market research shows that “weak” U.S. consumer demand for softgoods doesn’t show any sign of improvement.
And while some still believe the U.S. economy will make a “soft landing” because of a strong labor market, Sole believes many “don’t fully appreciate the macro challenges facing U.S. consumers or how acutely these challenges will likely negatively impact the Softlines industry.” While UBS data projects holiday-specific spending to rise 4 percent, the 2023 outlook for gifts is down 4.7 percent versus 2019. That could mean consumers will prioritize holiday spending, but at the expense of other shopping. Planned spending on non-gift items in the UBS survey is down 10 percent versus 2019.
The UBS market research data also found that consumers are planning on spending less on apparel and less overall. And since the post-COVID inflationary period, “apparel has been the category consumers have deferred purchasing most frequently compared to other categories like entertainment and electronics,” according to UBS data analytics.
By some estimates, spending won’t get going until early next month.
“It seems that retailers really can’t get consumers spending much before Halloween; and in the US, I would put it closer to Veteran’s Day,” Aptos Retail strategy vice president Nikki Baird said. “What’s going to happen this holiday season is completely unpredictable. If Halloween spending is a bust, that will be our best leading indicator of what will happen over the holidays.”
Morgan Stanley’s Simeon Gutman said in a research note Tuesday on Costco that traffic remains strong, while “basket size is modestly constrained by inflation and consumer wallet pressure.” He pointed to the membership club’s fourth quarter earnings call last month that noted that prices could fall in some categories.
On Wednesday, the Adobe Digital Price Index indicated that online prices continue to fall for discretionary categories. They were down 4.6 percent in September, year-over-year, for a 41-month low. On a month-over-month basis, online prices were down 0.6 percent. While September’s apparel prices were up 0.1 percent month-over-month, they were down nearly 2.7 percent year-over-year. Furniture and bedding prices were down 0.4 percent month-over-month and 3.7 percent year-over-year.
Declining prices may be more palatable for consumers, but they’re a margin headache for retailers. This is especially the case during the holiday selling period when retailers bought goods at prices higher than what they need to discount on top of planned promotions to clear out inventory before the end of the fiscal year.
And the problem could get bad for brand manufacturers too, meaning no fashion firm is immune to what may be looming on the horizon.
Lan Ha, Euromonitor International’s head of economic research, said China’s exports contracted by 14.5 percent in July, a sign of weaker global demand. Spending by Chinese consumers has also weakened, with falling consumer demand also tipping “consumer prices into deflationary territory, a typical sign of a weakening economy,” she said.
Justinas Liuima, Euromonitor’s industrial insights manager, believes that China’s slowdown and deflation risk will lead to overall slower growth for the global economy. “On the negative side, weaker B2B and private consumption growth will hit exporters to China,” Liuima noted, adding that China is one of largest consumers of luxury goods.
