Apparel Retail Prepares for an Uncertain Holiday Season

In the past year, apparel retailers such as Gap Inc. and Urban Outfitters battled an inventory surplus, forcing them to heavily discount items. This summer, they reported smoother sales, considerably reducing the need for aggressive price cuts. However, as the holiday shopping season approaches, retail executives express caution about consumer demand.

Retailers hesitate to label this as a consistent trend due to economic factors such as rising grocery and gas prices, resumed student-loan payments, and increased borrowing costs that strain consumer spending. Additionally, “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.”

According to a TD Cowen survey, 52% of US participants plan to keep or increase holiday spending from last year, despite 60% expecting a recession soon. A separate Wedbush survey discovered that 47% of US consumers aim to reduce gift spending this year, yet the percentage planning to gift clothing or footwear rose to 58%, possibly due to a decrease in spending on high-cost gifts such as electronics.

Nikki Baird, VP of strategy at Aptos, attributes increased cold-weather clothing demand to changing weather and the upcoming holiday season, as noted by Burlington Stores Inc. She also notes that a lack of high-interest electronics may shift purchases towards clothing.

For consumers with spare disposable income, they may anticipate extended periods of below-standard pricing. Retailers, on the other hand, face financial pressure as the ability to increase prices becomes a challenge. TD Cowen analyst, John Kernan, suggests discount chains could potentially flourish while other retailers struggle. 

Retail trends were also affected last year by the Russia-Ukraine conflict which escalated food prices and shifted consumer focus towards essentials, impacting clothing sales. This led to retailers marking down unsold items to make room for more demanded inventory—a trend that Kernan believes might stimulate a season of heavy promotions.

Insights from retail-traffic analytics firm Placer.ai highlight that discount clothing chains such as T.J. Maxx and Marshalls saw increased foot traffic in the third quarter. This contrasted the decline observed by major retailers like Target and Walmart and led to a share price surge for several clothing retailers after quarterly results exceeded expectations, even after a back-to-school-shopping boost.

Mixed developments have been reported by chains like Gap and Urban Outfitters. While Gap reported improved promotional activity and a slight uptick in Old Navy sales, Urban Outfitters cited lower merchandise markdowns. However, both chains tempered expectations for the critical holiday quarter.

Recent government data indicated a slight dip in U.S. retail and food-services sales in October from September, but a 2.5% year-on-year increase. Clothing sales remained steady but showed a marginal 0.8% year-on-year raise. 

The upcoming holiday season is marked by economic uncertainties, prompting consumers to gravitate towards less expensive gifts. Retailers can capitalize on this ‘trade down’ trend by offering competitive prices. However, this environment presses retailers’ margins, challenging their sales growth amid cooling inflation and fluctuating store traffic. 

Overall, the retail landscape faces a period of heightened uncertainty, making it challenging to predict consumer behavior amidst potential recessions, rising interest rates, and looming student-loan repayments.