Mixed signals in American retail

Company News

by Glenn Dyer

The headlines from American retailing for the first quarter of 2024 told a very mixed picture - lots of cold, some hot, and little in between for many chains.

Walmart strong; Target weak, do-it-yourself and builders' supplies giants like Home Depot and Lowe's Cos, weak, Ace Hardware - strong with its target being small towns and suburbs; department store chains like Macy’s OK, but rivals like Kohl’s tanking.

But there is one trend that is emerging strongly - that the death of the shopping mall and retail chains that have based themselves in those outlets has been greatly exaggerated to be wrong.

While the Big Box idea of Walmart, Target, Home Depot, and Costco is still doing fine and Amazon is chugging along, failing to destroy retailing as so widely forecast, the shopping mall and small chains are coming back.

The first-quarter reporting season shows that chains that were suffering from weak or vanishing demand/consumers are suddenly back in vogue as younger buyers emerge.

And this is leading to a revival for malls and not coincidentally a strong refuting of the long-held view that Amazon was going to eat their mall stores and sales.

Abercrombie and Fitch and Gap - two under siege fashion chains that were said to be dinosaurs - reported stronger-than-sales growth, while American Eagle Outfitters, a third chain said to be on death row by analysts, saw record sales in the first quarter.

Abercrombie and Fitch saw sales surge 22% (inflation-beating) to top $US1 billion for the first time. The shares ended up 17% for the week while Gap shares closed 31% higher by Friday after a 22% surge on Thursday when reported higher than inflation sales growth in all its chains, especially in its home US market.

Foot Locker, the sports shoe chain, saw a small 1.8% dip in same-store sales, but the overall performance was better than forecast and the shares had their best day in two years on Thursday and closed the week up 24%.

And, away from clothing and footwear, shares in consumer electronics giant Best Buy jumped nearly 19% over the week after it managed to boost earnings despite weaker sales in its latest quarter. Strong cost controls were the key which the market applauded on Thursday and again Friday.

What's interesting about Best Buy’s result was the way it protected margins, despite clear signs consumers were cutting back on discretionary purchases - a hint perhaps for JB Hi-Fi and Harvey Norman here later in the year?

US analysts said the revival for the likes of Gap, Footlocker, and Abercrombie and Fitch is down to millennials and Gen Z consumers moving into the breach abandoned by aging boomers and Gen Xers.

The performance of two other chains at opposite ends of the retail spectrum also stood out- shares in Burlington Stores, a low-price retailer, jumped 23% as it benefited from strong demand and cost-cutting. For the first quarter, it reported sales up 11%, earnings up 68%, and gross margin ahead of expectations. The Group raised its margin and earnings forecasts for the coming quarter and for the full year.

And Dick's Sporting Goods saw its shares leap 20% as it topped forecasts with solid first-quarter results, with sales up 6.2%, driven by higher transaction volumes and average ticket sales - you don’t need a set of golf clubs or a baseball bat to survive.

Many of these chains (Walmart, Macy’s for example) balanced at the end of April so they caught strong overall sales in February and March and then saw a slowing in April, but not enough to offset the earlier gains.

But there’s not a general lift for all chains. Rue21, a teen-skewing chain, went bust earlier this year and another chain called Express went belly up in April, and upmarket retailers like Capri Holdings (which owns Michael Kors, Jimmy Choo, and Versace) saw sales slump, down 2% over 2023 - and in the 4th quarter.

The weak performance helps explain why rival upmarket chain owner Tapestry wants to buy Capri - US government regulators willing. Capri owns Coach, Kate Spade, and Stuart Weitzman. US regulators think that’s too many upmarket chains under the one roof.

Analysts say that at the moment millennials and Gen Z consumers are not much interested in these chains because they haven’t made their way in the world to generate big incomes - and many have rising college debts and are trying to get on the housing treadmill. That’s a familiar story in the UK and Australia as well.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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