Retail execs say clothing demand is getting better. But it's still kind of a mess.

By Bill Peters

'Almost every category is decelerating relative to where it was over the summer,' analyst says

After unwanted shirts and pants piled up in warehouses and stockrooms last year, clothing chains such as Gap Inc. and Urban Outfitters have said over the past two weeks they've had an easier time selling clothing through the summer without slashing prices so aggressively.

But with Black Friday and the holiday season's most hectic shopping stretch around the corner, forecasts and commentary on consumer demand from executives have been cautious and convoluted.

Clothing sales nationwide inched higher last month, as cold weather set in and lifted sales of things like sweaters and fleeces. But retail chains remain reluctant to call any recent improvement in financials a trend. Wall Street's expectations are low. And while some survey data points to a possible uptick in customer spending on clothing for the holidays, broader unease prevails, as steeper prices for groceries and gas bills suck up more savings, student-loan payments return and borrowing costs rise.

For consumers still sitting on disposable income, that could mean a longer stretch of clothing sold for somewhere under the full price. For retailers, it could mean diminished financial benefits from not being able to charge more.

TD Cowen analyst John Kernan, in an interview last week, said with prices for basic goods still high, bargain-clothing chains were set to do more business. But the same couldn't be said for virtually anywhere else.

"Most other checks we've done suggest almost every category is decelerating relative to where it was over the summer," he said.

When Russia's invasion of Ukraine last year drove up food prices and gave grocery chains more leeway to keep prices elevated afterward, demand for clothing was particularly hard-hit amid the consumer exodus toward essentials. Clothing retailers' inventories got bloated, and they began marking down what they couldn't sell in an effort to replace it with things consumers wanted.

But Kernan said that even as retailers wrestle their stockpiles of merchandise lower, those inventory levels were still pretty high compared to the time before the pandemic. That trend, he said, could set the stage what retailers call a more "promotional" environment for the holidays, or one where weaker demand forces stores to sell things at cheaper prices.

"I think the promotions will be higher," he said.

Data from retail-traffic analytics firm Placer.ai showed that during the third quarter, foot traffic fell at Target Corp. (TGT) and Walmart Inc. (WMT). But it rose by double digits at discount clothing chains like T.J. Maxx and Marshalls -- both run by TJX. Cos (TJX) -- and Burlington Stores Inc. And with investors not expecting much from quarterly results, shares of many clothing retailers this month rallied as those results beat expectations.

Along with sweaters and fleeces, sequins, dresses, non-denim bottoms and the color red were among the items or trends executives highlighted on earnings calls. But signals for clothing remained mixed.

Target, for instance, noted "accelerating" clothing demand during the third quarter, helped by back-to-school shopping, even though clothing same-store sales still fell during the period, albeit not as badly as in the prior quarter. While management signaled clothing demand could accelerate more longer-term as prices for essentials fell, they still forecast falling same-store sales during the key holiday quarter.

At Gap (GPS), executives noted "improved promotional activity," following efforts to clean out their inventories, and a 1% same-store sales gain at Old Navy, the company's biggest store chain, after struggles there among low-income consumers. But the company expected this year's holiday discounting frenzy to be about the same as last year, and said they expected "flat to slightly negative" fourth-quarter sales.

Urban Outfitters (URBN), meanwhile, noted "lower merchandise markdowns" as well, said they were "confident" about the holiday demand, but not so much for its namesake stores, which have had a harder time gaining traction with younger consumers with less money. And they also noted a "slight moderation in demand" in demand in October, with November trending similarly, but said "customers continue to choose fashion newness as their preferred purchase, and are willing to pay full price for what they want."

Elsewhere, Abercrombie & Fitch Co. (ANF) raised its full-year outlook, but shares fell anyway, after a long run higher. Ross Stores (ROST) called out the "resilience of the off-price sector." Rival Burlington Stores (BURL) said the current quarter was off to a "solid" start. But while Burlington's management said lower-income shoppers were starting to recover from the hit they took last year, the company tweaked its full-year sales forecast to an increase of "approximately 11%" from the "approximately 11% to 12%" given in August.

Looking past September, when the third quarter for much of the retail industry ended, U.S. retail and food-services sales last month were down 0.1% from September but up 2.5% from October 2022, according to government data. And sales at clothing stores, while flat when compared to September, crept 0.8% higher year over year.

"There are a few components to this demand," Nikki Baird, vice president of strategy at retail software developer Aptos, said over email. "One is weather-related -- after a fairly warm early fall, we're seeing the cold come in much more and consumers are responding to that. One is holiday season -- consumers are reporting that clothing, shoes, and accessories are on the list as gifts this year."

She also said that a lack of blockbuster electronics during the season could lead to more clothing purchases.

Survey data on the state of the consumer is somewhere between not-great and could-be-worse. A TD Cowen survey of around 2,500 people in the U.S., published Friday, found that "52% of respondents expect to spend more or the same on holiday shopping vs. the prior year." Sixty percent expected a recession within the next six months.

Meanwhile, a Wedbush survey of nearly 800 U.S. consumers published on Thursday found that 47% of respondents planned to spend less on gifts this season, up slightly from last year. But the firm said the share of people who planned to give apparel or footwear as a gift had crept higher, to 58% from 55% last year.

"This could be a function of 'trade down,' as expected spending on big-ticket gifts such as electronics and 'experiences' were both down" year over year, Wedbush analyst Tom Nikic said in a research note.

Home-improvement retailer Home Depot Inc. (HD) last week noted that some customers had shied away from more expensive 'big-ticket' purchases. Executives at mattress maker Sleep Number Corp. (SNBR), during its quarterly earnings call this month, said "perceived affordability of the Sleep Number smart bed became a real barrier" amid an abrupt drop in demand.

"Big-ticket items are typically financed purchases, so they're going to be an early warning of any consumer-spending crunch driven by interest rates," Baird, at Aptos, said.

The National Retail Federation, an industry group, expects record spending over the holiday season, with sales gains of between 3% and 4% to a range of $957.3 billion to $966.6 billion. But some have said inflation-strained shoppers might do the bulk of their buying on big discount days, and cut back on expedited shipping and other more expensive perks.

"Consumers will benefit from better prices and promotions, and also from the rise of private-label offerings to find more value," Matt Pavich, senior director at Revionics, a pricing analytics company that is part of Aptos, said in emailed remarks.

But for the retailers themselves, and their investors, those lower prices will squeeze margins. And outside of clothing, retailers face bigger questions about how to grow sales in the months ahead, after relying on price increases -- from their own higher costs, and their best guesses on how much customers will pay up -- to plump up sales.

"Retailers have ridden the wave of inflation to grow revenue and will find it more challenging to drive revenue growth with inflation cooling and store traffic still posing a challenge for multiple segments," Pavich said.

Baird said that she expected all non-essential retail to be shaky in the months ahead.

"We're just in such a period of extreme uncertainty -- will there be a recession? Will consumers run out of money with rising interest rates and student-loan repayments, or won't they?" she said. "That's nearly impossible to tell."

-Bill Peters

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

11-22-23 1843ET

Copyright (c) 2023 Dow Jones & Company, Inc.