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Retailers lower outlooks with discretionary spending under pressure

Aug 26, 2022
Illustration of a retail shopping bag full of market trend arrows.

Illustration: Aïda Amer/Axios

Discretionary apparel retailers proffered less-than-sunny earnings vistas this week, with Macy's, Nordstrom, T.J. Maxx parent TJX, Victoria's Secret and Abercrombie & Fitch all lowering their outlooks.

  • Gap completely withdrew its second-half forecast on falling sales, while Urban Outfitters missed estimates.

Why it matters: After a resurgence in 2021 — when the apparel industry saw one of its best financial performances in years — it was always going to be a difficult comparison, says David Swartz, consumer sector equity analyst at Morningstar.

State of play: Apparel retailers were playing catch up. Late shipment arrivals earlier this year led to over-padded inventories; fashion shifted to back-to-work attire; and inflation spiked causing overall demand to slow.

Yes, but: It's not been all bad news, though you might have to squint to see it — Ulta Beauty, for example, beat estimates and raised its full-year outlook.

  • Dick's Sporting Goods also beat expectations and raised the lower end of its comparable sales guidance — it still expects a negative number, but that is relative to its excellent performance last year, Swartz says.
  • Retailers are also getting some relief as shipping costs come down and as extra shipping capacity is expected to come online next year, he says.
  • "We’re seeing areas of retail that are not as affected," adds Matthew Jacob, an equity analyst at M Science, pointing to purveyors of luxury goods, such as Michael Kors' parent, Capri, and Coach's parent, Tapestry.

Yes, and: Luxury is the crown jewel of apparel's deal market right now, with several big names currently on the auction block.

Between the lines: Less affluent consumers impacted by inflation are more cautious about their spending and are waiting for promotions before they buy apparel, Jacob tells Richard.

  • Discounting is coming, with retailers severely over-inventoried, he says.
  • It's the reverse problem of last year, when retailers didn't have enough supply to meet the demand, leading them to accept late shipments to avoid inventory gaps, Jacob explains.
  • To parse further, Nordstrom fared well when it came to selling its higher-end goods, while its discount banner, Nordstrom Rack, continues to struggle, he says.

Be smart: Some of the results from Q2 can also be traced to consumers traveling more, says John Tomlinson, M Science's global director of research.

  • That excuse won't be there to lean on in Q3 — so we'll get a better idea of the impact of a slowing economy, he says.

By the numbers: Macy's Q2 net sales declined about 0.8% to $5.6 billion, while comparable sales decreased 1.5% and net income fell by 20.3% to $275 million.

  • Nordstrom's Q2 net sales increased about 11.9% to nearly $4 billion, while net earnings increased 57.5% to $126 million.
  • TJX's Q2 net sales decreased 2% to $11.8 billion, while U.S. comparable sales declined 5% and net income increased 3% to about $809 million.
  • Victoria's Secret's Q2 net sales declined 5.7% to about $1.5 billion, while comparable sales decreased by 8% and net income fell by 55.6% to $67 million.
  • Abercrombie & Fitch's Q2 net sales fell by 7% to $805 million, while the company recorded a net loss of nearly $17 million compared to net income of almost $109 million a year ago.
  • Gap's Q2 net sales were down 8% to nearly $3.9 billion, while comparable sales fell 10%. While it had a net loss of $49 million, when adjusted, it had net income of $30 million.
  • Urban Outfitters' Q2 net sales increased about 2.2% to nearly $1.2 billion, while comparable sales increased 1% and net income fell by 53.5% to $59 million.
  • Dick's Sporting Goods' Q2 net sales declined 5% to about $3.1 billion, while comparable sales fell 5.1% and net income decreased 35.7% to nearly $319 million.
  • Ulta Beauty's Q2 net sales increased 16.8% to nearly $2.3 billion, while comparable sales increased 14.4% and net income grew 17.8% to almost $296 million.

What we're watching: There are still a few retailers to go (and perhaps some better news on the way) including Lululemon, which is likely to report another quarter of growth and profits.

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