First-quarter results from apparel retailers including Kohl’s Corp., Gap Inc. and Guess? Inc. all impressed investors this week with better-than-expected earnings and margin improvements. Sales, on the other hand, fell across the board.
(Bloomberg) — First-quarter results from apparel retailers including Kohl’s Corp., Gap Inc. and Guess? Inc. all impressed investors this week with better-than-expected earnings and margin improvements. Sales, on the other hand, fell across the board.
The progress on profitability is likely to continue throughout the year as transportation and raw-material costs come down, and as retailers offer fewer discounts now that they’ve whittled down bloated inventories. But macroeconomic uncertainty and increasingly conservative purchasing decisions by shoppers suggests sales growth will be strained for some time.
Gap, for example, reported first-quarter gross margin above the average analyst estimate and slightly positive adjusted earnings per share, compared with an expected loss. At the same time, comparable sales were down 3%, due to large declines at the Athleta and Banana Republic brands.
“Stabilizing the bottom line is important and to be welcomed, but Gap needs to start engineering growth on the top line,” Neil Saunders, managing director at GlobalData Plc, wrote in a note. “This requires a lot more effort and a clear and compelling strategy, both of which are absent.”
That dynamic was similar at Kohl’s, which also exceeded gross-margin expectations while posting a worse-than-forecast comparable-sales decline. Goldman Sachs analysts were encouraged by Kohl’s progress on inventory control, margins and businesses such as beauty and active. But they cautioned that “a weak macro backdrop and ongoing competitive pressures will drive ongoing market-share declines and limit financial outperformance.”
Economic data indicates that consumers are shifting their spending away from nonessentials like apparel, home goods and electronics as the pandemic-induced shopping binge comes to a close. In April, spending at clothing stores fell 0.3% from the prior month and was down 2.3% from a year earlier, according to the Bureau of Labor Statistics.
That means retailers will continue to struggle to deliver sales growth in coming quarters.
“Consumers are thinking more carefully about what they want and need and have cut back on the number of items they buy,” Saunders wrote after the BLS report. “Discounting, which is becoming more prevalent in the sector, is failing to stimulate demand as consumers try to budget more effectively.”
To be sure, sales growth was strong for brands that are resonating with shoppers and cater to mid-to-high-income consumers. Abercrombie & Fitch Co.’s namesake brand and Urban Outfitters Inc.’s Free People and Anthropologie brands — which are popular among Gen Z and millennial women — all posted double-digit comparable-sales increases.
While there are some bright spots in apparel, success later this year will largely depend on economic conditions, including the status of student-loan forbearance, the labor market and inflation.
“Households are still spending, but cracks in the foundation are increasingly apparent in the form of rising debt burdens and an increasing number of delinquencies,” Lydia Boussour, senior economist at EY, wrote in a note. “With hiring prospects softening and credit conditions tightening, elevated prices could become prohibitive.”
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