Consumers trucked along with inflation on everything from gas to eggs, but a regional bank failure, coupled with smaller tax returns seemed to be the final straw for demand.
Retail executive after retail executive over the past week have highlighted a consumer demand shift as their companies transitioned into the spring.
“What we’re observing is a much choppier environment for the way that the consumer is reacting to the news and how that’s impacting the way they’re spending,” San Francisco-based Gap Inc. CFO Katrina O’Connell told analysts late last month.
Gap’s portfolio ranges from its more value-priced Old Navy nameplate to Gap and the higher-priced Banana Republic.
O’Connell reported a weakening of the business in demand, followed by some moderation in April. However, some of that softness continued into May.
Victoria’s Secret, which reported its fiscal first quarter results last week, offered a similar take.
“I don’t think that we have a single silver bullet answer for why the market turned so dramatically between Q4 and Q1, but we see it in the numbers across the board with high-single digit decreases in the market,” Victoria’s Secret CEO Martin Waters told analysts Thursday.
The intimates retailer said it was forced to be more promotional than originally planned. It capped the quarter ended April 29 with net sales down 5% to $1.4 billion. Net income shrank to $1 million from $81 million a year earlier.
Other executives noted similar changes in consumer demand. That included Irvine-based Tilly’s Inc., where CFO Mike Henry said the slowdown is indicative of an “environmental type of issue,” and not, for example, necessarily related to an off-trend product assortment.
Los Angeles-based Guess Inc. saw the same behaviors play out for its North American business. The company saw the issues began in February as the West Coast was pummeled with heavy storms, wind and cold weather.
Read My Lips: No More Promotions
Retailers and brands were already tasked with battling high inventory levels going into this year, with a merchandise glut stemming from the supply chain issues of the past few years.
They marked down and clearanced to push levels down. Now, they face a buying slowdown that could chip away at efforts to work through the inventory excess.
“We have a plan in place looking at the future and thinking about what can we do to really improve both conversion rates and increase units per transaction as it’s possible without being highly promotional,” Guess CEO Carlos Alberini told analysts last week. “We want to stay with our key innovation strategy and that represents big commitment to not being very promotional.”
Steering clear of too many markdowns is important as the Los Angeles denim company focuses on elevating its brand.
“We are not going on a promotional run here,” Genesco Inc. CEO Mimi Vaughn told analysts late last month, after pointing to competitor retailers that have placed many brands, not typically discounted, on sale.
The run up in promotions there has taken a bite out of business for Genesco’s Journeys footwear chain, which expects to shutter more than 100 underperforming doors this year.
Seattle-based Nordstrom Inc. President and Chief Brand Officer Pete Nordstrom offered a slightly more upbeat take on discounting, albeit the sentiment was tempered with caution.
“On the promotional environment, the most telling sign of that is just inventory position that our competitors are in. We tend to respond to what’s happening around us in terms of price and…as we’ve been paying attention to different companies reporting [earnings], it seems like almost everyone’s down on their year-over-year inventory levels,” Nordstrom said. “So I think that probably bodes pretty well for the promotional pressures we might find. But it’s early days. We’ll see how this all plays out.”
Consumer Bifurcation?
The general logic’s held higher-income households have been more insulated from inflationary pressures to date, and that’s holding true depending on the brand.
Philadelphia-based Urban Outfitters Inc. is seeing success with its Anthropologie and Free People banners, geared toward an older consumer that doesn’t seem to bat an eye at a $248 Farm Rio jumpsuit, $148 Bl-nk kaftans, $148 onesies or $128 hoodies.
“Clearly, these brands are pleasing existing customers and capturing additional market share,” Urban Outfitters Inc. CEO Richard Hayne said. “We currently see no signs of change in customer behavior, no indication that customers are shopping less frequently buying fewer items or trading down.”
Meanwhile, Anthropologie and Free People’s sister chain Urban Outfitters, which caters to a younger consumer, has been limping along, dropping 13% in net sales for the quarter ended April 30.
Others are seeing even the consumer with greater discretionary income tighten their purse strings.
“With the high-end consumer, they’re pretty resilient, but they’re also cautious and we’re seeing that really across the board, that caution,” Nordstrom said.
The shift in buying behavior is baked into Gap’s outlook ranges for the rest of the year, largely due to executive uncertainty over what the market will see.
“When you look at markets where we have a demographic of low-income consumers, we are certainly seeing those consumers contract their spending and being much more price-sensitive,” Gap’s O’Connell said. “In areas where we have the higher-income consumer, there’s a lot less price sensitivity and they are still spending. So that dynamic has continued. And as of now, we’ll see how that plays forward.”
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