Rising Wages, Tighter Inventory Spark Retail Holiday Optimism
Executives at Macy’s and Kohl’s said shopping trends are improving and gave upbeat outlooks for the upcoming season
Shoppers near Macy's in Herald Square, New York City. Both Macy’s and Kohl’s said sales fell in the most recent quarter. PHOTO: BEBETO MATTHEWS/ASSOCIATED PRESS
With just two weeks until Black Friday—the day after Thanksgiving that kicks off the holiday buying season—executives at the nation’s biggest department stores said Thursday they are seeing signs that consumers are turning their attention from voting to shopping.
Macy’s Inc. and Kohl’s Corp. cited improving sales trends and gave upbeat outlooks for the key holiday season, despite posting another quarter of declining sales as the chains struggle with changing shopping habits and competition from discounters.
Nordstrom Inc., meanwhile, reported a sales increase and lifted its financial targets for the year.
“We have momentum coming out of October,” Kohl’s Chief Executive Kevin Mansell said. “We feel we’re very well positioned for the upcoming holiday season.”
Shares of the companies rallied in Thursday’s trading, giving a lift to other retail stocks.
Mr. Mansell was concerned about an election hangover, due to uncertainty about President-elect Donald Trump’s agenda. But Macy’s CEO Terry Lundgren said: “To have a group of the population feeling like their voices have been heard is a positive thing.” With wages rising and unemployment low, he added, “there is a potential for consumers to spend in the fourth quarter.”
Mr. Mansell said better inventory management could help shield the company from seasonal or political volatility.
“We are doing things with an eye to the long-term,” he said. This should “continue to benefit us regardless of whether or not you think the consumer is in a buying mood for holiday or is still not so much.”
A more complete picture of the consumer mind-set will emerge next week when other large chains such as Wal-Mart Stores Inc., Target Corp. and Home Depot Inc. report their latest results.
Perhaps even more important than the impact of the election on retail sales is the unseasonably warm weather across much of the country.
Inventory levels are in good shape compared with a year ago but that could change if cold weather doesn’t materialize, leading to “another over-inventoried, heavily-promotional holiday season,” Citi analyst Kate McShane wrote in a note to clients.
Consumer spending has been strong this year as Americans have benefited from low inflation, rising wages and high levels of employment. At the same time, people are shifting spending online and making fewer trips to stores, according to retail executives.
The National Retail Federation has projected that holiday sales—online and in stores—excluding autos, gas and restaurant sales will increase 3.6% to $655.8 billion this year. Last year, holiday spending fell short of the NRF’s 3.7% forecast, coming in at 3.0%.
Shoppers increasingly are opting to make purchases online, especially at Amazon.comInc. or at fast-fashion chains such as H&M Hennes & Mauritz AB, leaving department stores struggling with lower foot traffic. The NRF projected that non-store sales, including online purchases, will increase between 7% and 10% to as much as $117 billion.
Both Macy’s and Kohl’s have tried to adapt. Macy’s has been closing weaker stores and adding kiosks that sell Apple Inc. watches or other electronics. Kohl’s has brought in more national brands, such as Nike Inc. and American Girl dolls. But both still rely on heavy discounts to drive foot traffic.
Neil Saunders, the chief executive of Conlumino, a retail research firm, noted that Macy’s made just 2 cents for every $1 in revenue in the latest quarter. The results, Mr. Saunders said, “show a company grappling with what looks like a terminal decline.”
Some brands, such as Michael Kors Holdings Ltd. and Ralph Lauren Corp., that historically have relied heavily on department stores are pulling back from those chains in an effort to sell more goods at full price. On Thursday, Ralph Lauren reported that sales to department stores fell 10% in its latest quarter, while Michael Kors said sales in the channel dropped 18.4%.
Macy’s, Kohl’s and Saks Fifth Avenue, which is owned by Hudson’s Bay Co., on Thursday all reported lower sales at existing stores for the latest quarter. However, the chains reduced inventories, putting the companies on stronger footing heading into the holidays than last year.
Nordstrom executives said lower inventory levels at their stores, and throughout the industry, are resulting in fewer discounts and more stable margins. Several of the department stores had to resort to heavy discounting to clear unsold goods that piled up during the 2015 holiday season.
Shares of Macy’s gained 5.6% on Thursday, while Kohl’s rose 11.5%, and Nordstrom climbed 7.2%. Shares of J.C. Penney Co., which reports earnings Friday morning, jumped 5.4%.
People have been spending less on clothing, handbags and other items traditionally sold in department stores, and shelling out more on travel, dining out and other entertainment.
Mr. Lundgren, of Macy’s, said the company’s strategy of adding more exclusive products has helped apparel sales recover. “We’re taking share in that category,” he said.
The company also has been shrinking its footprint. On Thursday, Macy’s struck a deal with real-estate investor Brookfield Properties to redevelop up to 50 locations. Financial terms weren’t disclosed.
During the summer, Macy’s said it would shut 100 stores, about 15% of its base, in addition to 40 closures announced earlier this year.
Overall, Macy’s reported a third-quarter profit of $17 million, down from $118 million a year earlier, hurt by restructuring costs. Sales fell 4.2% to $5.63 billion.
Kohl’s profit rose 22% to $146 million, while revenue fell 2.3% to $4.33 billion.
