Consumers Are Still Spending, but Retailers Are Bracing for Impact

As retailer after retailer has reported second-quarter over the last two weeks, the message has been loud and clear: sales were good, even great this summer. Don’t expect it to last.

Kohl’s, Lululemon and American Eagle trimmed their annual sales forecasts this week, while Foot Locker, PVH Corp. and Birkenstock affirmed their already-cautious previous guidance. Gap confirmed its full-year sales guidance of slight growth amid a turnaround under chief executive Richard Dickson. Even red-hot Abercrombie & Fitch disappointed in its way, raising its sales outlook, but not enough to match Wall Street’s high expectations.

They followed Macy’s and Urban Outfitters, which sounded cautious notes last week. In most cases, share prices plunged, as investors priced in the likelihood that a remarkably strong run for American retailers would soon come to an end.

For months, concerns about the economy have been mounting, centring on US consumers amid a slowdown in the formerly red-hot jobs market and record levels of credit card debt.

Those fears have so far not shown up at the mall. But that’s starting to change: Shoppers are already flocking to lower-priced retailers, often a sign that the economy is cooling. Off-price chains like T.J. Maxx and Walmart, which both raised expectations and have seen shares roar this month. Nordstrom also raised its fiscal outlook on a better-than-expected quarter that was boosted in part by momentum in its Rack segment.

Retailers that don’t operate in the off-price category may find themselves relying on promotions to hold onto customers, analysts warn.

“We’re going to see a bit more survival of the fittest, cream rising to the top [for fashion],” said Katie Thomas, head of Kearney’s Consumer Institute. “There’s almost too many options and that’s why it feels like death by a thousand cuts for retailers.”

Defined By Discounts

Discount and value shopping has grown faster than general retail spend since 2022, according to a report from Bank of America. For mass and mid-price consumers, this means there’s increasing pressure to discount even for those in healthy financial positions.

But retailers must tread carefully, according to Sonia Lapinsky, managing director and retail advisor at consultancy AlixPartners. Rampant discounts can eat at profitability, but promotions can be a powerful tool for moving merchandise.

“Pricing is going to be a huge lever for retailers, but they’ve got to be much more surgical about it. It can’t just be 40 percent off the whole store,” said Lapinsky, adding retailers can strategise discounting based on what products are capable of actually bringing shoppers in.

Discounting has to be balanced with other activities, especially at a time when consumers are frustrated because retailers aren’t getting the basics, like mix and customer service right, she added. On its earnings call, Lululemon chalked a slowdown in its womenswear business up to merchandising misses.

A well-timed and culturally savvy marketing strategy couldn’t hurt, either.

PVH, for instance, is set on reviving its flagship Tommy Hilfiger and Calvin Klein brands with buzzy campaigns, including another Jeremy Allen White spot for Calvin Klein this week. Gap, led by new CEO Richard Dickson and creative director Zac Posen, released a campaign fronted by Troye Sivan last week, on the heels of a successful stream of collaborations with labels such as Madhappy.

Trading Down or Just Trading Around?

Luxury has been hampered by an ongoing slowdown, particularly among aspirational shoppers in the US. Most consumers traded down, meaning they delayed purchases, bought less or hunted for better prices, from May to August, McKinsey found in a report on consumer sentiment last week.

Shoppers are being driven by value, but they’re “scrimping and splurging,” said TD Cowen analyst Oliver Chen. In other words, they have been trading up where they want to and trading down where they need to.

Private label brands at Nordstrom and Walmart have gained momentum, and dupe culture — where consumers brag about cheaper but similar alternatives to popular products on social media — continues to drive spending. Consumers have myriad options, meaning, quality is a big factor in making a decision and brands need to nail their price-value equation, said Thomas.

Retailers lost in the middle will be tested if they capture neither a scrimping nor a splurging shopper.

Amid the gloom, there are some causes for hope: interest rate cuts, which could ease pressure on consumers, are expected in September. Despite a disappointing jobs report, wage growth has stayed steady. Analysts will be watching for mass layoffs which would bruise consumer confidence, as well as for the outcome of a consequential election on the horizon. But fashion has sounded the alarm on an imminent drop in spending before, and consumers have responded, largely, by continuing to shop.

“The word ‘resilient’ has lost all meaning, but the consumer is hanging in there,” said Thomas. “Consumers are coping with realities and that’s where we’ll be for the next couple of months.”

FASHION, BUSINESS AND THE ECONOMY

Abercrombie sales beat underwhelms after big run-up in stock. The company surpassed analysts’ sales expectations for the sixth straight quarter, with a notable 18 percent rise in comparable sales driven by Hollister, though gross margins fell slightly short.

PVH Corp. reports 6 percent sales drop, driven by weak international segment. The owner of Tommy Hilfiger and Calvin Klein saw a modest increase in North America sales for its two major brands.

Gap’s surprise earnings release shows strong second quarter. Net sales in the period ended Aug. 3 rose 5 percent from a year ago, to $3.7 billion.

Victoria Beckham losses shrink as sales soar 50 percent. The fashion and beauty business reduced losses to £200,000 ($262,956) with a 52 percent sales surge to £89 million last year, driven by online growth and expansion into new product areas.

Lululemon cuts annual forecasts on tepid US demand, rising competition. The company has seen a slow start to 2024 as sales moderate after years of strong growth as persistent inflation led to selective spending by shoppers.

Lanvin Group posts 20 percent drop in sales amid luxury slowdown. The Lanvin, St. John and Sergio Rossi owner expects the year to remain challenging but is betting on a creative overhaul to reignite sales growth at the company.

Bangladesh garment industry short on cotton as floods worsen protest backlog. Bangladesh is a leading global cotton importer, but the devastating floods mean few trucks and trains have been able to bring supplies to factories from Chittagong port over the last week, industry officials and analysts said.

Walmart takes on Amazon by adding pre-owned watches, collectibles to marketplace. The retailer is expanding its online marketplace to include pre-owned watches, collectibles like trading cards, and high-end beauty products, aiming to capture more e-commerce spend and compete with rivals like eBay and Amazon.

Nordstrom second quarter revenue rises on boost from sales event, shares surge. The upmarket department store chain revised its annual comparable sales forecast, raising the lower end to a range of flat to 2 percent growth.

Birkenstock disappoints investors with unchanged outlook. Birkenstock reported €186 million ($206 million) in adjusted earnings before interest, taxes, depreciation and amortisation for the quarter that ended June 30, up 15 percent from last year and was in line with analyst estimates.

Kohl’s profit gets a lift from cost controls, leaner inventories. The retailer has increased its annual profit forecast after surpassing second-quarter earnings expectations, buoyed by effective cost management and reduced inventory.

Foot Locker plummets as investors unimpressed by progress. Foot Locker exceeded sales expectations with a 2.6 percent gain and $1.9 billion in revenue, but investors were underwhelmed by the unchanged annual sales forecast, leading to a drop in shares.

Kurt Geiger increased sales by nearly 10 percent in the year ended Jan. 2024. Sales of handbags boomed after it cut prices by 5 percent to target fashion fans switching to affordable luxuries, just as many luxury brands had upped price tags.

Ganni to show in Paris. The move comes after the brand — which typically shows in homebase Copenhagen — hired Laura du Rusquec, a former Balenciaga executive, as CEO in April.

THE BUSINESS OF BEAUTY

Ulta Beauty cuts sales outlook on slowing consumer demand. Ulta Beauty Inc. trimmed its sales forecast as more US consumers cut back on makeup and cosmetics in the face of higher prices and elevated borrowing costs.

Milk Makeup owner Waldencast reports 25.7 percent Q2 growth. For the three months ended June 30, the parent company of Milk Makeup announced 25.7 percent net revenue comparable growth, up from 21 percent in the first quarter.

Estée Lauder launches Balmain Fragrances. The collection, called Les Éternels de Balmain, comprises eight gender-neutral fragrances, priced at $300.

Gen-X brand Sarah Creal Beauty enters Sephora. The product developer behind Tom Ford Beauty and Victoria Beckham Beauty brings Sephora its first brand specifically for the 40-plus demographic.

Tower 28 Launches in Australian retailer Mecca. The move comes as the LA-based clean makeup line looks to scale. Last year, it more than doubled its internal team from 12 employees to 32.

PEOPLE

Willa Bennett named editor-in-chief of Cosmopolitan and Seventeen Magazine. The former Highsnobiety editor-in-chief will oversee the publications’ content strategy and editorial direction across print, digital, social media and video mediums.

Next loses equal pay claim against mostly female retail workers. An employment tribunal has ruled that the British retailer must pay over £30 million in back pay to 3,540 current and former in-store sales workers who were found to be underpaid compared to their male warehouse counterparts.

Calvin Klein drops another Jeremy Allen White campaign. Content featuring the actor rolled out across social media and outdoor advertising spaces over the week. White’s January campaign generated a massive amount of buzz for the brand, boosting underwear sales 30 percent year-over-year in the week after it launched.

MEDIA AND TECHNOLOGY

The Independents acquires Dubai-based Bureau Béatrice. The multi-media and creative technology agency expands the reach of the communications group — which has offices in New York, London, Madrid and Paris, as well as a presence in Asia — into the Middle East.