The Gap logo is displayed at a Gap store in Los Angeles on April 25, 2023.
Mario Tama | Getty Images
Retail’s biggest first-quarter winners aren’t blossoming because consumers are suddenly spending more on discretionary goods – it’s because they’re doing well and cash-strapped customers are choosing them over competitors.
If there’s a lesson to be learned from the results posted by major U.S. retailers over the past few weeks, it’s that shoppers are still spending money, but they’re being much more selective about where.
Feeling the weight of persistent inflation, high interest rates and an economy that seems tougher than it actually may be, consumers are prioritizing purchases that provide the right combination of value, convenience and fun.
Companies like Abercrombie&Fitch, TJX companies AND Gap they impressed Wall Street with their results while others liked it Kohl, American eagle AND Objective disappointed.
Take Gap and Foot cabinet — two unlikely winners who posted results on Thursday. Both retailers are implementing ambitious turnaround plans and are achieving better-than-expected results thanks to the recent strategies they have implemented.
Gap reported positive comparable sales for all four of its brands – Athleta, Venerable Navy, Banana Republic and its namesake banner – for the first time in “many years,” exceeding overall Wall Street expectations, the company said.
Over the years, Gap has lost market share to fierce competitors. But under recent CEO Richard Dickson, the marketing guru credited with reviving the Barbie brand, the clothing chain has focused on financial rigor, brand storytelling and product development. In less than a year, Gap’s sales and profits have improved significantly, and its brands are becoming part of the cultural conversation again.
A few weeks ago, actress Anne Hathaway attended a party at Bulgari wearing a white Gap shirt dress designed by the company’s recent imaginative director, Zac Posen. Most importantly, Gap made the dress available to consumers for $158, and it sold out within hours. This combination of marketing and exclusive product drops is what Gap has long been missing and what competitors were already doing.
Interest in Foot Locker has waned over the past few years, but with the right combination of recent strategies and a bit of luck, its turnaround is showing signs of life.
Under the leadership of CEO Mary Dillon, Foot Locker has worked to transform its stores, where it makes more than 80% of its sales. It sought to create not only a better shopping experience for consumers, but also a better place for key brand partners.
Instead of two walls of shoes with competing brands mixed in, Foot Locker is changing its fleet so that the brands have their own unique displays. Dillon told CNBC that a recent “store of the future” concept at a Novel Jersey mall that brings this strategy to life has become the best-performing store in North America in just a few weeks, adding that brands are thrilled with the recent look.
The change couldn’t have come at a better time. After years of following Nike’s strategy of eliminating wholesalers and selling directly to consumers, the retailer realizes it has gone too far and is now changing course.
With refreshed stores and better product exposure, consumers are also converting more and paying full price – even lower-income customers at Foot Locker.
“Our consumer… is a category that is very critical to them. So when people have discretionary income, it may be restricted, but the priority will be what you spend it on, right?” Dillon said. “We’re proving that people are willing to spend full price, but you have to have the right products and serve them in a way that’s tempting, right? That’s why the customer experience really counts here.”
Elsewhere, Dick’s Sporting Goods released a solid first-quarter report on Wednesday after executives said average sales prices and transactions were up and saw no signs that consumers would look for cheaper options. That doesn’t necessarily mean customers are spending more, though: Dick’s has long been considered a best-in-class operator that offers a solid shopping experience, which means it can win even when consumers are picky with their spending.
Denim Wars
Two retailers who didn’t have great quarters – American eagle AND Kohl — tell a story about underperforming or missing trends.
American Eagle easily beat earnings estimates on a recent strategy to spur profitable growth, but missed revenue and issued cautious guidance that was slightly below Wall Street expectations.
American Eagle president and imaginative director Jennifer Foyle told CNBC that the brand is working to eliminate products that don’t resonate with shoppers and delve into those that do. She said that in the past, the retailer focused too much on jeggings, but now baggy, low-rise styles are in fashion.
During a Thursday visit to the American Dream mall in Novel Jersey, a co-worker told CNBC that the location has no low-cut, casual stores and is only available online. Meanwhile, a wall of jeggings appeared. Still, denim was in mighty demand for the company during the quarter, and its range of other styles was in mighty demand from customers in the location, the company said.
Denim spends a moment with shoppers. A Morgan Stanley research note shows that searches for denim are at their highest level in the last 20 years of data, especially for categories such as tops and dresses.
Kohl’s misses the mark in a much more significant way. The retailer posted dismal numbers on Thursday as both profits and revenue fell well low of expectations. It lowered its full-year forecast and its shares fell more than 20%, the largest one-day percentage decline on record.
The needy performance illustrates the challenge the retailer continues to face: keeping up with trends and staying current.
CEO Tom Kingsbury told CNBC that he expects the head-to-toe denim trend to play a role in the second half of the year, but may already be out of style by the time Kohl’s starts adding recent clothes to its shelf offerings.
“Denim is a good business for us. “I mean, it’s really not the most critical time for denim,” Kingsbury said. “We sell shorts and T-shirts. And not just, you know, warm-weather products.”
Gap, one of the denim industry’s longtime leaders, didn’t seem concerned about denim falling out of favor with warmer weather. CEO Dickson said the company is preparing to launch an “exclusive, lightweight denim fabric” called “Ultra Cushioned” for summer.
Not keeping up with trends is an ongoing problem for the aging Kohl’s department store. In March, Kingsbury told CNBC that Kohl’s was purchasing products for its junior department, which caters to teens – one of the hottest areas in its stores – 12 to 14 months in advance. When the garments hit the sales floor, they were “dead on arrival.”
At a time when viral TikTok videos dictate the life and death of trends, it’s more critical than ever for retailers to track what’s working with customers and what’s not. Not only are they competing with legacy players, but they are also competing for customers with inventive but controversial startups like China-linked Shein, which can turn an idea into an online product in a matter of weeks.
This is a far cry from the turnaround times of In armor, where it currently takes about 18 months for a product to go from idea to showroom floor. On a May 16 earnings call with analysts, CEO Kevin Plank called the system “simply uncompetitive in a 2024 context” as he outlined a plan to improve the process.
Meanwhile, Abercrombie & Fitch posted another stellar set of results, even though comparisons are starting to get tougher. It has experienced explosive growth, in part because the company responds quickly to its customers’ needs and has an proficient supply chain that allows it to follow trends quickly and effectively.
It posted its best first quarter ever and now expects sales to grow 10% in fiscal 2024, up from previous guidance of 4% to 6%.
CEO Fran Horowitz told CNBC that loose, low-rise jeans are also very popular with customers. During a recent visit by CNBC to a Hollister store located within walking distance of the American Eagle location, customers saw plenty of this style of jeans immediately upon entering the store.
