Foot traffic at U.S. stores has decelerated, and that could be a sign of bad news for first-quarter sales for fashion brands and retailers.
For the third week ended March 18, U.S. retail traffic rose 5 percent, down from the up 11 percent in the prior week. In general, U.S. retail traffic averaged at up 7.3 percent through the first three weeks of March, down from up 19.6 percent in February, according to an analysts’ report from TD Cowen’s retail group. February’s data point was below January’s average of up 44.9 percent year-over-year.
March apparel traffic in the U.S. rose 4.5 percent in the third week, a sequential deceleration from the prior week’s increase of 11.8 percent. For the month, apparel traffic average up 8.2 percent month-to-date, but that was down from February’s gain of 20.4 percent. In comparison, January’s apparel traffic was up 48.6 percent, which was up from the 18.9 percent gain in December 2022.
Those data points are not that different from what’s seen thus far in the monthly U.S. retail sales reports from the U.S. Bureau of Labor Statistics. U.S. retail sales in January was up 3 percent, representing the biggest increase in two years. On a seasonally adjusted basis, retail sales fell 0.4 percent in February.
One problem impacting store traffic trends is likely attributed to a much colder and wetter weather pattern when compared with 2022 levels over the same period. According to Weather Trends International, average temperatures nationally are expected to the eighth coldest and ninth wettest since the start of the 1990s, the TD Cowen research note said. One area cited is the South, which is expected to be hit by freezing temperatures to start Week Four. And the west coast has already been hit by another storm causing elevated precipitation in the region. The analysts noted that with the northern U.S. temperatures expected to be the coldest in five years, that will be a “headwind for spring categories.”
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But there are also indications that consumers could be tapped out. And The Conference Board’s chief economist Dana Peterson has spoken about how credit card trends point to a troubling scenario. She said the people are increasingly paying with plastic, a factor that has contributed to higher delinquencies. The Conference Board will disclose results for its Consumer Confidence Index for March on Tuesday, which is expected to provide insight on how consumers are managing spending against an inflationary backdrop.
A number of retailers in their fourth quarter earnings report provided indications that they expect a slowdown in consumer spending, at least for fashion purchases.
Walmart’s executive vice president and chief financial officer John David Rainey spoke about how nearly half of its sales were from higher-income households. In addition, with consumers focusing more on food and consumables, the discounter expects that apparel and home good sales won’t fare as well this year. Over at its discount competitor Target, CEO Brian Cornell spoke about how challenging retail is at the moment. He also noted strength in food and household essentials, offset by “softness” in discretionary categories that include apparel. Even at department store retailer Macy’s Inc., it is expecting 2023 sales to be down 1 to 3 percent from 2022 levels to between $23.7 billion to $24.2 billion. The bright spot is that sales are forecasted to turn positive—but not until 2024, according to Macy’s CEO Jeff Gennette.
Wells Fargo retail analyst Ike Boruchow earlier this month noted that traffic trends turned negative in February’s second week in a trend that continued for the rest of the month. “With potentially lower tax refunds and government subsidies versus last year, and colder weather into the latter half of March—more difficult selling for spring product—we are cautious on near-term trends,” the analyst said.
But as Boruchow sifted through fourth quarter earnings reports, he believes there’s another reason why first quarter earnings could hit a snag. A “stubbornly heavier” inventory hangover will interfere with bullish projects to recoup margins, he said.
Boruchow noted that some brands were still relying on promotions in February as first retail quarter started on Jan. 29. Promos are up at Levi Strauss & Co., while at Victoria’s Secret is pushing deals on apparel and swim.
“After seeing sector inventories peak at up 39 percent in 2Q, our inventory tracking suggests a 4Q ending inventory balance of up 8 percent year-over-year for the space,” Boruchow said. “So while improving, our 1Q 2023 estimate forecasted inventory-to-sales spread at down 8 percent still portends potential margin pressure” into the first half of 2023.
Most companies expect to get their inventories under control this year, largely in the second half. “With first quarter numbers in particular coming down on rocky sales and weaker gross margins—and we expect to some extent [into] second quarter, our best guess for better inventory alignment with go-forward sales is into the Back-to-School season,” he said.
Nike’s third quarter report came in ahead of estimates, but investors sent the company’s shares down because of the Swoosh’s mixed guidance. Nike’s Fiscal 2023 sales outlook increased to the high-single digits from the prior outlook for mid-single digits.
For Bank of America Securities retail analyst Lorraine Hutchinson, the lower gross margin outlook was the biggest takeaway. Nike expects gross margin to decline by 250 basis points in Fiscal 2023, at the lower end of prior guidance, because of higher markdown activity, North American supply chain costs and foreign currency impact.
“In Fiscal 2024, we expect gross margin will increase 200 basis points as Nike recaptures a portion of the 350 basis points of transitory margin headwinds incurred over the last two years. We see ocean freight and clearance as the two biggest Fiscal 2024 opportunities,” Hutchinson said