Retailers aren’t planning for the one thing everyone’s talking about
In 2020, retailers were caught off-guard by the COVID-19 pandemic. In 2021, the industry was caught off-guard by tangles in the supply chain. In 2022, inflation led consumers to prioritize what they had to buy instead of what they wanted to buy, leading to fattened inventories of clothes and electronics.
As 2023 dawns, one would think retailers would be preparing for yet another worst-case scenario. But as cautiously optimistic sentiment prevails despite consumer struggles, analysts say many retailers aren’t seeing the one thing everyone else is worried about: An economic downturn.
“They’re definitely not planning for a recession,” said Quo Vadis Capital analyst John Zolidis, who follows retailers ranging from Walmart Inc.
to Lululemon Athletica Inc.
to Starbucks Corp.
“I haven’t heard a single retailer tell me that that’s how they’re planning their business.”
Mari Shor, an analyst at Columbia Threadneedle, said her own conversations with retailers went largely the same way.
“Everyone’s trying to plan quote-unquote conservatively, but when you push the companies and you look at what other investors are expecting, no one is expecting a modest recession in their base case,” she said, or a downturn that at worst leads to a slight dip in same-store sales.
The main reason? Consumer demand, while strained, could be worse, and retailers generally plan ahead based on present trends.
Any benefits from consumer spending will land unevenly across different retailers and different income levels, analysts told MarketWatch. Despite the rabid inventory decluttering that retailers underwent this year, it’s unclear whether prices will actually end up lower than before the pandemic next year. And prices for some products — like handbags, beauty products and outdoor gear — might stay higher than more “commoditized” items like shirts and pants.
Economists say there’s a 70% chance of a recession in the U.S. next year, according to a Bloomberg survey. But as the Federal Reserve raises interest rates in an effort to push borrowing costs higher and lower prices by tamping down economic growth, consumer data has been mixed. U.S. retail sales in November fell 0.6%, marking the biggest decrease in nearly a year, as weaker automobile demand offset holiday spending. Inflation, however, appears to be cooling. And other analysts say consumers, at the moment, aren’t faring that badly.
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“Consumers have proven resilient in 2022,” Bank of America analysts said in a report this month. “While they are likely to have a tougher time next year, especially if the labor market deteriorates, they are starting 2023 in decent financial shape.”
“Deposit balances are coming down, but slowly, and credit card usage does not currently look out of line with prepandemic levels,” they continued.
Retailers, Zolidis said, weren’t positioned for any further drop in consumer spending. While he said some expressed caution, particularly around the continuing discount wars, he said that caution was far different than actually planning for a recession. He said he hadn’t heard anything from any retailer that indicated they were bracing for lower demand.
“The retail management teams with whom we speak do not consider themselves to be economists,” Zolidis said. “They have little ability to forecast inflation beyond what is immediately apparent. They’re no better at predicting interest rates than anyone else.”
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Shor said that retailers often plan ahead based on trends over the past six months when determining how to approach selling for some categories that aren’t considered basic necessities, like home goods. But as the pandemic’s fallout still ripples through the economy, she said that a volatile backdrop complicated forecasting.
“The disconnect between the macro and the micro, I think, is also wider than ever,” Shor said. “So it’s harder and harder to look at the macro data and try to decipher what that’s going to mean for your business in particular.”
Retailers, writ large, haven’t offered specific forecasts for 2023 yet. Analysts generally expect sales increases. But how much of those gains will be driven by keeping prices higher — a tactic store chains embraced in 2022 — or actually selling more goods remains to be seen. Commentary about the year ahead from executives has been similarly muddy.
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Walmart Chief Financial Officer John Rainey, during the retailer’s earnings conference call in November, said: “Looking beyond Q4, we know some of the unanticipated cost experienced this year shouldn’t repeat next year. That said, we’re planning our business with the assumption that inflation remains somewhat elevated.”
Elsewhere, Target Corp.
has described “rapidly softening demand and elevated uncertainty.” Williams-Sonoma Inc.
has said “trends have been increasingly inconsistent and less predictable.” discounter Ross Stores Inc.
said it expected rising prices to hurt its low and middle-income customers, but that it faced easier comparisons for the fourth quarter.
Analysts say that supply-chain congestion, which has pushed up transportation costs, could ease next year. Retailers are still raising wages, which will add to their costs and make fatter profits harder to come by. Wall Street will also be watching for any “trade-down” effects — whether customers who generally bought more expensive items at stores might switch to, say, store brands from national brands, smaller pack sizes from larger ones, or to essential purchases from discretionary ones altogether. Low-income consumers, unsurprisingly, are under the most pressure.
analysts, in a recent research note, suggested that clothing shoppers were getting pickier as prices rose, and that the wardrobe overhauls brought on by a return to pre-pandemic life were becoming less vigorous. They said that customers were less likely to seek out cheaper alternatives for things like handbags — potentially to the benefit of Tapestry Inc.
— but more likely to seek more affordable items like jeans, possibly at the expense of companies like Levi Strauss & Co.
“Consumers are increasingly discerning with their apparel spend, driving choppy results dependent on events, newness and promotions,” the analysts said.
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Zolidis said that other companies, like Yeti Holdings Inc.
have convinced customers to pay far more for things like coolers than they have in the past. Running-shoe maker On Holding
had also managed to innovate enough through shoe design, to stay relevant — and thus higher-priced, he said. And he said the beauty category, which to some degree was on hiatus during the height of the pandemic, was benefiting from digitally-focused brands and new colorways in makeup, and other newer trends in fragrances and hair care — all of which helps maintain interest in a company like salon chain Ulta Beauty Inc.
Shor, meanwhile, said that discount retailers were also best-equipped for the current retail landscape, as the post-lockdown world remains tough to navigate.
“I actually feel like coming out of COVID, it’s actually been harder,” Shor said. “And unfortunately, it’s not getting easier for the companies to try to manage their businesses on the other side of all of it.”