Though most companies in the sector should have sunny first-quarter earnings reports when they address Wall Street in the weeks ahead, what lies ahead for the rest of the year might be cloudy with a chance of rain.
Some retailers are already holding off on core basics orders while keeping the fashion merchandise flowing in. Credit card data indicates that apparel and department stores sales could be hitting the skids after getting off to a good start this year.
Now Wall Street is getting nervous, too.
Get ready for fashion and retail companies to start walking back their earnings per share estimates, according to UBS U.S. softlines retail analyst Jay Sole, who believes risks from inflation to geopolitical tensions are beginning to rewrite corporate outlooks this year.
A spending downturn projected to manifest last month is seen dragging on through July, according to April’s UBS Softlines Spending Forecast.
Over at Wells Fargo, specialty softlines analyst Ike Boruchow expects many companies reporting first-quarter results will be “negatively revising guidance” or maintaining what some investors might describe as “aggressive outlooks.” Gap Inc. and Carter’s have already taken estimates down. Though he isn’t sure if Gap’s news is “company specific or a sign of things to come,” Boruchow noted an uptick in promotions last month and the highest level in the past 12 months.
The analyst last month warned that investors should take fashion’s “increasingly unrealistic” earnings guidance with a grain of salt. He expects that companies in the sector are “more likely than not” to miss the rosy 2022 projections many issued heading into the current calendar year when they expected last year’s strength to continue.
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Retail consultant Gabriella Santaniello of A Line Partners said she’s seen discounts and promotions steadily creep back into play since mid-January. “The higher-end stores are still relatively strong, like Nordstrom, but we even hear that at retailers such as Macy’s that mid- and lower-income customers are struggling,” Santaniello said. Low-income consumers started to show signs that all is not well back in August, according to the Goldman Sachs U.S. Low Income Tracker. Traffic at dollar stores leaped 5.4 percent in April from March.
While revenue shouldn’t be an issue, margins could be in trouble, thanks to retail’s renewed reliance on promos. “And then I think outlook is going to be very uncertain,” Santaniello said, adding that value and discount retailers could soon pick up consumers forced to shop deal-focused distribution channels.
Who stands to suffer the most if inflation sticks around? Mid-tier players such as Macy’s and Kohl’s as well as retailers that primarily sell clothes, according to Moody’s. Macy’s chief financial officer Adrian Mitchell recently described inflation as the biggest unknown “over the next couple of months” and for the year as a whole. With oil, gas and grocery prices surging, some consumers won’t be able to stomach even more sticker shock for purchases like clothing and shoes that they might be able to do without.
The U.K. is facing a similar picture. Foot traffic there last month fell to 15.9 percent below 2019 levels from 15.3 percent in March, according to data tracking firm Springboard, which isn’t sure yet if the numbers signal a “precursor to a contraction” in retail sales.
For now, companies including Capri, Tapestry and Ralph Lauren that have the leverage to charge more for their products without a massive customer revolt should be in good shape for the near term. Capri-owned Michael Kors raised prices last year and this year again, and customers seem no worse for wear. Tapestry, which owns Kate Spade, Coach and Stuart Weitzman, also has yet to see any meaningful backlash over higher prices, CEO Joanne Crevoiserat said last week.
Jessica Ramirez, a retail research analyst at Jane Hali & Assocs., believes shoppers are “not really pushing back because it’s kind of been put into the scenario that there isn’t too much inventory out there.”
“So if someone doesn’t have something and you’re looking for something, you’re going to have to go to where that inventory is,” she added.
The luckiest companies have retrained their customers to buy at full price, according to Ramirez, who says even these players are starting to lean on promotions a little bit more. But with most discounts “still below 30 percent,” so far it’s been “nothing alarming,” she said.