With the majority of retail companies having reported fiscal 2nd quarter earnings by now, a picture is emerging of an industry continuing to struggle with a very weak consumer spending environment. Most retailers were able to beat earnings estimates through cost-cutting and inventory management initiatives, but top-line results have been soft as demand seems to have stabilized at a very low level.
Yesterday, KPMG released a survey titled “Surprising Majority of Retail Executives Expect Higher Revenue, Profitability, Improved Jobs Outlook in 2010.” Commenting on the results, Mark Larson, KPMG global retail sector chair, said “The KPMG survey findings reflected an expression of guarded optimism among retail executives, given the industry’s challenges as demand for goods continued to plummet during the recession,”
And the top-level results certainly seem to show some optimism: 70 percent of the executives said they expect business conditions to improve in 2010, with 68 percent expecting stronger revenue and 66 percent expecting improved profitability. However, after seeing some more of the survey findings, “cautiously hopeful” might be a more apt description of how retail executives are feeling about the future:
- However, 44 percent of those surveyed still believe the U.S. economy as a whole could take as long as 2011 or later to substantially recover
- When survey respondents were asked to identify the triggers they think will spur a U.S. economic recovery, the most frequently cited factors by far were increased consumer spending (52 percent), improved consumer confidence (51 percent) and an increase in jobs/employment (48 percent)
- 49 percent of the respondents said they thought the retail industry would fully recover ahead of the U.S. economy, while 51 percent thought their industry would recover at the same time or after the U.S. economy
- Overall, 84 percent of retail executives see an improving jobs picture in their industry in 2010, with 52 percent saying it would be stable and 32 percent saying it will be better than 2009
It seems retail executives are more “hopeful” that things “may” improve, rather than optimistic that they are seeing actual improvement. Relying on consumers to spur the recovery is a risky proposition, especially when you consider how leveraged the consumer is to further deterioration in housing and employment.
The back-to-school season isn’t expected to provide much relief, with many analysts predicting the worst shopping season in a decade. There is hope yet though, as the National Retail Federation reported that the average American family had only completed only 41.6 percent of their back-to-school shopping as of August 11, while nearly one-third of families with school-aged children haven’t even started their shopping.
Controlling costs and inventory, and providing merchandise and values that drive traffic will be key to companies improving efficiencies and gaining market share through the end of the year. As we can see from the below comments from executives on 2nd quarter conference calls, companies are continuing to adjust to a very tight consumer spending environment:
Blake W. Nordstrom – President and Director – Nordstrom
“Though July represented some improvement, our plans remain unchanged for the balance of the year. We really don’t see outside of this unique sale event a change with the customer. Our grounded plans do allow us to be able to respond timely and effectively if an upturn were to occur,”
“And we believe we’re planned accordingly, with grounded plans on expense and inventory and all the key metrics of our business to give us the necessary flexibility and upside to respond accordingly when that demand hopefully improves.”
Karen M. Hoguet – Chief Financial Officer, Executive Vice President – Macy’s
“So our guidance is not anticipating any enormous improvement. I did say that I am cautiously optimistic that we will start to get some benefit from the My Macy’s rollout in the fourth quarter, as we did in the test 20 districts last year. But that remains to be seen and obviously a lot depends on the economic environment which I don’t think any of us can predict at this point.”
Kevin Mansell – President, Chief Executive Officer, Director – Kohl’s
“all of our primary research and our own response rates on events have continued to indicate the consumer is very focused on stretching their dollar, making their budget go further, and seeking optimum value.”
“We recognize that our spring results over-achieved our expectations in both sales and earnings per share. At the same time, both our primary and our secondary research indicate the consumer continues to face economic challenges and intends to continue to shop less and looks to seek ways to stretch her dollar. We would expect the second half of this year to continue to be a fight for market share.”
Mike Jeffries – Chairman and Chief Executive Officer – Abercrombie & Fitch
“We continue to be confronted with very challenging conditions during the second quarter.”
“,consumer spending patterns domestically continue to be dictated by cost and value propositions and this is clearly a headwind for our premium brands.”
Stephen I. Sadove – Chairman and Chief Executive Officer – Saks
“As we look to fall, we expect that the economic conditions will remain extremely difficult for the balance of the year if not beyond, and we’re continuing to plan accordingly.”
“Although sales trends are undoubtedly more stable than they were in the fall of last year, the current economic and retail landscape is still uncertain and we know that predicting future sales and gross margin performance with any certainty remains very difficult.”
Gregg Steinhafel – President & CEO – Target
“Consumers remained cautious resulting in weak guest traffic and transaction size, retail prices especially in food and commodities continued to decline resulting in deflationary pressures and the economic recovery appeared to temporary stall as the country cycled the impact of last year’s stimulus checks.”
Eduardo Castro-Wright – Vice Chairman – WalMart
“we expect that the economy will remain difficult. Our own surveys point to ongoing concerns by consumers about their own financial situation. More people are concerned about unemployment.”
Mike Duke – President and CEO – WalMart
“Consumers continue to face a difficult global economy, having to do more with less.”
“Overall, our customers are more disciplined in their spending. There’s a new normal now where people are saving more, consuming less, and being more frugal and thoughtful in their purchases.”
