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Reopening the ‘Experience Economy’ Fuels January Retail Sales

U.S. retail sales in January rose 7.2 percent year-over-year, with online sales rising 10.4 percent versus January 2021.

The data from Mastercard SpendingPulse indicated that pent-up savings, wage growth and the re-opening of the “experience economy” helped drive the increase in consumer spending, excluding auto purchases. Beneficiaries included department stores, apparel and luxury, which all saw double-digit growth.

“Coming on the heels of the holidays, January typically marks a month of returns and exchanges. However, the strong growth across sectors reflects the optimism and eagerness for the year ahead,” Steve Sadove, senior advisor for Mastercard and former CEO and chairman of Saks Inc., said. “With nearly all sectors up, we see consumers returning to their shopping habits with a continued emphasis on digital.”

Apparel sales rose 37.6 percent in January year-over-year, a continuation of the positive growth the sector has experienced for 11 consecutive months as consumers opened up their wallets to refresh their closets. Department stores saw a similar gain, with January sales up 10.5 percent year-over-year and up 9.8 percent when compared with pre-pandemic levels. In luxury, the gain in sales was 45.3 percent year-over-year, with sales expected to continue to outperform ahead of Valentine’s Day, Mastercard said.

E-commerce sales jumped 110.1 percent over pre-pandemic levels, and rose in the double-digit percent range versus a year ago. Restaurant sales jumped 36.7 percent year-over-year, and were up 16.6 percent versus pre-pandemic levels.

When compared with Visa’s U.S. Spending Momentum Index (SMI), which slipped to a seasonally adjusted 102.4 in January from a revised 109.4 in December, the initial thought might be that consumers were no longer in a spending mood, contrary to results from January’s Mastercard SpendingPulse. However, that might not be true, given that a tally above 100 on Visa’s SMI still indicates consumer spending. Moreover, the decline from December’s reading was attributed to the rise in Covid cases due to Omicron.

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“The SMI readings continue to reflect that there is a clear indication of spending growth moderation in January,” Visa chief economist Wayne Best said. “That said, we expect more robust spending in the months ahead as virus concerns slowly subside.”

SMI for discretionary purchases in January fell 3.9 points from December to 100.6. In addition, SMI readings in the South, Midwest and Northeast were the softest, while the West had the strongest SMI reading, suggesting that severe wintry weather also may have played a role in curtailing consumer spending in January.

Pricing and promotions

Corey Tarlowe, a Jefferies equity research analyst covering department stores and specialty softlines, said data for the retail fourth quarter through Jan. 25 indicates that discounts fell on average 400 basis point from a year ago, versus a decline of 200 basis points from the third quarter. Average selling prices (ASP) were up 12.3 percent in the fourth quarter year-over-year, versus up 1 percent in the third quarter. The retail calendar runs through the end of January to include the post-holiday selling period and typically begins in February.

“In our view, strong promotional control and customer demand—healthy consumer plus pent-up demand and fashion tailwinds—coupled with tight inventory levels can help offset potential supply chain and Covid-related headwinds in [the fourth quarter],” Tarlowe said.

In a deep dive into pricing and promotion data on eight apparel brands over as many years, the analyst found that Gap, Old Navy, Anthropologie and Urban Outfitters saw improvements in both discounting and ASPs, while Abercrombie & Fitch saw a modest increase in discounting and ASPs.

In addition, both Old Navy and Gap each saw ASPs rising 6 percent in the quarter from a year ago. Moreover, Gap saw “significant improvement” in ASP from the third quarter, rising 1.4 percent year-over-year. Discounting was also down at both Old Navy and Gap, reflecting sequential improvement from third quarter levels.

At Urban Outfitters, fourth quarter ASPs rose 8 percent year-over-year, reflecting a significant improvement from the third quarter’s decline of 8 percent. Anthropologie’s ASPs spiked 31 percent in the fourth quarter from year-ago levels, and improved sequentially from the third quarter, which was down 2 percent. Discounting also declined in the fourth quarter. Even though the specialty chain said at the ICR Virtual Conference last month that there could be fourth quarter gross margin deleverage because of higher-than-expected inbound freight costs, “we believe Urban Outfitter’s ability to better manage promotions can help offset supply chain-related headwinds,” Tarlowe said.

Over at Abercrombie, Tarlowe found that fourth quarter ASPs for the core Abercrombie division were up 1 percent year-over-year, as discounting jumped 123 basis points year-over-year. But Tarlowe acknowledged that the ASP and discounting data might not be reflective of the company’s total inventory. Moreover, the slight improvement in pricing and increased promotions is also in contrast to management’s note of a double digit improvement in AUR (average unit retail) versus fiscal 2020 and fiscal 2021 levels due to reduced depth and breadth of markdowns and promotions. And the specialty retailer has said that gross margin could be flat relative to pre-pandemic levels even against 650 basis points of freight-related headwinds.

While Tarlowe noted potential risk to Abercrombie’s margin performance, he said, “we continue to believe Abercrombie is well-positioned to drive top-line growth as multi-year efforts spanning marketing, product, and in-store presentation have yielded two brands that resonate with their distinct audiences.” In addition to the core Abercrombie brand, the specialty chain also operates the teen brand Hollister.

Retail checks and inventory

Store checks in New York and New Jersey earlier this month found that apparel inventory varied by category and retailer, while home remained soft. Stephanie Wissink, lead broadlines analyst, said that more warm-weather items were on display.

Among the department stores in New Jersey, apparel inventory was mostly solid at a Kohl’s store in Secaucus, but there were some softness, such as with footwear merchandise. Home inventory was lighter. At a Macy’s store in Jersey City, inventory overall was “very healthy” except for some slight softness in home. On the day of the Jefferies visit, Macy’s was holding a one-day sale, “which included winter coats for 60 percent off,” the same promotional discount that was in the store when the equity research team visited in December.

At a Nordstrom Rack location in Manhattan, inventory selection appeared largely the same as in January. “Contrary to the store in Memphis we visited in Nov to Jan, this N.Y.C. location did have near full footwear inventory. Overall apparel inventory seems very healthy, which aligns with Nordstrom inventory substantially higher versus 2019. However, increased promos [were] up to 70 percent off throughout store,” Wissink said.

Among the mass discounters, apparel inventory was strong in a Target in Jersey City, including swimwear. In a Walmart store in Secaucus, apparel inventory was mixed, Wissink said.

ICSC on holiday

Jefferies’ data broadly aligns with ICSC’s holiday report.

An online survey of 1,007 U.S. shoppers from Jan. 3-Jan. 5 showed that 50 percent spent more on gifts than they did the year before.

Retail raked in 17 percent more revenue throughout November and December than the same period in 2020, though many consumers began shopping long before the traditional promotional period. On average, those who spent more reported spending about 21 percent more year over year—”a strong sign of resurgence for the retail industry,” ICSC said. Among the reasons for the higher spend—which averaged $1,011 per shopper on gifts, décor and experiences—were factors like higher product costs (28 percent), more gift recipients (26 percent), and the desire to create a “celebratory atmosphere” after Covid restrictions (25 percent).

Despite shipping delays and inventory challenges, ICSC reported that 64 percent of shoppers were satisfied with retail’s performance, noting that they thought stores did a good job of keeping shelves stocked with appealing merchandise. Some 45 percent of consumers said they began their gift shopping earlier than they had in years past in light of the highly publicized supply chain disruption.

What’s more, 86 percent of holiday shoppers purchased in person this year. “Shoppers returned to stores in higher numbers this year for a number of reasons, including the in-store shopping experience that allows them to see the products for themselves and get them immediately,” ICSC spokesperson Stephanie Cegielski told Sourcing Journal. “That draw, combined with lessened Covid-19 restrictions and strong pent-up demand, led to an increase in foot traffic at stores, malls, and restaurants.”

Concerns over product availability and e-commerce delivery delays encouraged consumers to purchase at brick-and-mortar locations and drove 61 percent (versus 58 percent in 2020) to buy a gift card instead of a tangible gift, she added. Consumers spent an average of $103 on gift cards this winter, with millennials and Baby Boomers leading the pack.

“Leading up to the holidays, consumers were mindful of shipping delays and the ongoing supply chain constraints,” Cegielski said, and for some, the items they wanted were on backorder or out of stock entirely. “Rather than opting for a substitution or risking a gift arriving late, some chose to purchase a gift card for that retailer so the recipient could then make the purchase themselves when the item was back in stock.”

Some 43 percent of shoppers used buy online, pick up in store (BOPIS) and curbside pickup this winter. “We expect click-and-collect options to see continued adoption amongst both retailers and consumers in 2022,” Cegielski said.

“The benefits for retailers are significant as well, as 88 percent of consumers made additional in-store purchases when picking up,” she added—evidence that “a cohesive omnichannel experience, including in-store shopping, remains crucial.”

“Looking ahead, the retailers that will see the most success in 2022 are those who continue to maximize potential across all available channels, meeting the consumer and their needs where they are,” Cegielski said.