Consumer behavior is notoriously difficult to predict, swayed by a wide range of variables and often simply capricious. Still, many apparel industry analysts are confidently forecasting a disappointing holiday shopping season due to the shift generated by historically low interest rates to buying bigger ticket items.
According to Sears CEO Eddie Lampert, “As people are spending more money on their cars and homes, they are cutting back elsewhere, such as their spending on items like clothes and shoes.”
Consumers have noticed that currently low interests rates have been steadily rising over the last few months and, in anticipating of further increases, are focusing their attention on larger purchases that would require a loan. Erich Patten, a manager at Cutler Investment Group LLC, observed, “Consumers recognize that financed purchases will be more expensive with rising rates, and thus are prioritizing them in the current economy. Demand for soft goods will return as interest rates rise and purchasing patterns normalize.”
At least for the short term, and this includes the important holiday shopping season, consumers are expected to to spend more on housing, automobiles and major appliances. According to poll issued by Ipsos Research, 26 percent of US shoppers plan to spend considerably less on clothing this holiday season than typical and a meager 12 percent intend to spend more.
Contributing to consumer wariness are increases in payroll taxes and the rising cost of gas. Alison Paul, vice chairman at Deloitte LLP, explains, “You can’t get out of paying your taxes and you have to have gas to go to work and school. Those are real numbers that really do impact real Americans, and I think that’s where other discretionary spend takes a hit.”
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While this trend bodes well for home improvement chains that rely upon appliance sales, like Home Depot and Lowe’s, it spells trouble for apparel retailers like Macy’s, Wal-Mart, Kohl’s and Target, all of which posted weak second quarter numbers.
Shawn Kravetz, president of Esplanade Capital, said, “We’re not saying run away from apparel. We’re saying you have to make sure it really looks good on you. Investors just have to be choosier than ever because it has gotten very messy and very challenging very quickly.”
And it’s not just consumers that are increasingly cautious. More and more hedge funds are moving out of the apparel retail sector in search of firmer ground, mostly healthcare, technology and telecoms.
Patty Edwards, chief investment officer of Trutina Financial, placed some of the blame on the fashion industry itself. “The problem now is that there is no fashion, and if there is no newness, clothing becomes a commodity. Beyond a select few, I’d think twice about getting into apparel and retail stocks.”