Heading into the busiest shopping season of the year, U.S. retailers have reason for hope — and plenty of unanswered questions.
Best Buy stock (BBY), Dick’s Sporting Goods (DKS), Abercrombie & Fitch (ANF) and Burlington Stores (BURL) did hit multi-month highs this week, but Burlington beat quarterly earnings results and noted that consumer spending remains resilient.
Yet Nordstrom (JWN) shares came under pressure after the department store chain said third-quarter sales fell year-over-year, and CEO Erik Nordstrom noted that “macroeconomic pressures hit all customer segments with a big impact on the lowest-income groups.” A day earlier, Dollar Tree (DLTR) shares fell after the discounter saw more of its customers focus on necessities. Target (TGT) fell 13% on the day last week after citing a sharp recent slowdown in consumer spending, the Dow Jones US Retail Index is down 28% this year, outpacing the S&P 500’s 16% decline.
It adds another muddled portrait of the US economy. Many fear it is headed for a recession as the Federal Reserve raises interest rates to slow high inflation. For retailers, the holidays go a long way toward answering a nagging question: Are shoppers back to stay, or will higher prices push them out again?
- Shares of Best Buy, Dick’s Sporting Goods and Abercrombie & Fitch rose on Nov. 22 after the retailers beat profit estimates.
- Spending has stabilized this month even as lower-income consumers struggle with high inflation, retail executives say.
- U.S. sales rose year-over-year at Dick’s, Abercrombie and Dollar Tree, but fell at Best Buy and Nordstrom.
- Burlington Stores expects inflation to fall as the economy slows next year.
While consumer confidence has faltered and households have cut back on spending, some retail chains are benefiting from cost-cutting, lower shipping costs and their recent efforts to control inventory. Supply chain disruptions have mostly been resolved – albeit the potential nationwide freight rail strike in early December is a new risk.
Shares of Best Buy jumped 12% to a three-month high on Tuesday after beating profit estimates and raising its full-year outlook, even as comparable sales for the quarter ended Oct. 29 fell 10.5% year over year. CEO Corie Barry acknowledged “what is clearly a challenging environment for our industry” on the earnings conference call. and the company projected a 10% year-over-year decline in comparable sales for the fourth quarter.
Transaction volumes fell and discounting was more prevalent than a year ago, boosted by pandemic payments. The quarterly earnings surprise reflected cost-cutting, including layoffs that caused a $26 million severance charge.
“Over the holidays and into next year, we believe it will continue to be uneven,” Barry said. “Indicators remain unusually mixed. The labor market remains strong, consumer spending continues and inflation appears to be slowing somewhat, but savings are beginning to erode. Consumer confidence is low. The housing market is cooling and inflation remains a major concern. Basics such as food, fuel and accommodation all have a profound and lasting impact.”
Shares of Abercrombie soared 21% to a six-month high on Tuesday after the casualwear chain beat estimates and improved its full-year earnings and comparable sales outlook as U.S. sales rose 3% year over year. Abercrombie is “cautiously optimistic” about the holiday season, CEO Fran Horowitz said. Third-quarter sales trends have gradually improved from the second quarter, and current-quarter sales are “running in line with third-quarter levels,” it said in an earnings report.
At Dick’s Sporting Goods, comparable sales rose 6.5% in the third quarter, following a 12.8% increase a year earlier, as consumers increased spending on sports and outdoor activities due to the pandemic. The retailer raised its annual sales and profit forecasts, although comparable sales for the fiscal year ending January 2023 are still expected to decline slightly, and its shares jumped 10% to a two-month high on Tuesday.
“We feel incredibly good about the momentum of our business coming out of a very strong Q3,” Dick’s CEO Lauren Hobart said on a conference call. “We’re very excited about Q4. We’re being cautious just because of the uncertain macroeconomic environment and the fact that the consumer is going through a lot right now, but our confidence is as high as it’s ever been.”
It was a similar story at Burlington Stores, whose shares jumped 20% to a six-month high even after missing earnings estimates. The company is optimistic about 2023 in part because it expects the economy to slow, which will lead to an increase in traffic to its lower-priced stores as consumers look for bargains, CEO Michael O’Sullivan said on earnings.
“In 2022, lower-income customers will bear the brunt of the impact of inflation,” he said. “As we look forward to 2023, we do not expect this headwind to disappear, but we believe it should moderate if inflation levels continue to decline.”
Discounter Dollar Tree wasn’t so lucky, with its shares down 7.8% on Tuesday, even as the chain beat expectations and raised its sales outlook.
“The economy continues to put pressure on middle- and low-income households, resulting in convenience purchases,” said Dollar Tree CFO Jeff Davis. “We expect consumables to outperform discretionary, which has a negative impact on gross margin.”