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Holiday Shopping Looms as Some Retailers Say Sky Isn’t Falling

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U.S. retailers heading into the year’s busiest shopping season have reason for hope — and plenty of unanswered questions.

Shares of Best Buy (BBY), Dick’s Sporting Goods (DKS), Abercrombie & Fitch (ANF), and Burlington Stores (BURL) notched multi-month highs this week after all but Burlington beat quarterly earnings results and noted consumer spending remains resilient.

Yet Nordstrom (JWN) shares came under pressure after the department store chain said third quarter sales dipped year-over-year and CEO Erik Nordstrom noted that “macroeconomic pressures impacted all customer segments, with outsized impact in the lowest income groups.” A day earlier, Dollar Tree (DLTR) shares slid after the discounter noted more of its customers are focusing on necessities. Target (TGT) tumbled 13% in a day last week after citing a sharp recent slowdown in customer spending, The Dow Jones U.S. Retail Index has dropped 28% this year, outstripping a 16% decline in the S&P 500 index.

It adds up to another muddled portrait of the U.S. economy. Many fret that it’s headed for recession as the Federal Reserve raises interest rates to slow high inflation. For retailers, the holidays will go a long way toward answering a nagging question: Are shoppers back to stay or will higher prices push them away again?

Key Takeaways

  • Best Buy, Dick’s Sporting Goods, and Abercrombie & Fitch shares rallied Nov. 22 after the retailers beat profit estimates.
  • Spending has stabilized this month even as lower-income consumers struggle with high inflation, according to retail executives.
  • U.S. sales were up year-over-year at Dick’s, Abercrombie and Dollar Tree, but down at Best Buy and Nordstrom.
  • Burlington Stores expects inflation to decline as the economy continues to slow next year.

While consumer confidence has faltered and households cut back on spending, some retail chains are benefitting from cost-cutting, reduced shipping expenses and their recent efforts to control inventories. Supply chain disruption have mostly been solved—although a potential nationwide freight railroad strike by early December is a new risk.

Best Buy shares jumped 12% Tuesday to a three-month high after it beat profit estimates and raised its annual outlook, even as comparable sales for its quarter ended Oct. 29 fell 10.5% year-over-year. CEO Corie Barry acknowledged “what is clearly a challenged environment for our industry” on the earnings conference call and the company projected a 10% year-over-year decline in comparable fourth-quarter sales.

Transaction volumes fell and discounting was more prevalent than a year ago, boosted by pandemic relief payments. The quarterly earnings surprise reflected cost cuts, including layoffs that caused a $26 million charge for termination benefits.

“As we head through the holiday and into next year, we believe it will continue to be an uneven backdrop,” Barry said on the call. “Indicators remain unusually varied. The job market remains strong, consumer spending continues, and inflation appears to be slowing a bit, but savings are starting to erode. Consumer confidence is low. The housing market is cooling and inflation remains a particular concern on the basics like food, fuel and lodging, all of which have a profound and sustained impact.”

Abercrombie shares soared 21% to a six-month peak Tuesday after the casual apparel chain beat estimates and upgraded its annual earnings and comparable sales outlook as U.S. sales rose 3% year-over-year. Abercrombie is “cautiously optimistic” about the holiday season, said CEO Fran Horowitz. Third-quarter sales trends improved sequentially from the second quarter and sales in the current quarter “are running consistent with Q3 levels,” she said on its earnings call.

At Dick’s Sporting Goods, comparable sales rose 6.5% in the third quarter on top of a 12.8% gain in the prior year as consumers ramped up spending on sports and outdoor activities in the wake of the pandemic. The retailer raised its annual sales and profit forecasts, though comparable sales for the fiscal year ending in January 2023 are still expected to be down slightly, and its shares jumped 10% to a two-month high on Tuesday.

“We feel incredibly good about the momentum in our business coming out of a very strong Q3,” Dick’s CEO Lauren Hobart said on a conference call. “We’re very enthusiastic about Q4. We are being appropriately cautious just because of the uncertain macroeconomic environment and the fact that the consumer is going through a lot right now, but our confidence is as high as it’s been.”

It was a similar tale at Burlington Stores, whose shares jumped 20% to a six-month high even after missing earnings estimates. The company is optimistic about 2023 in part because it expects the economy to slow, driving traffic to its off-price stores as consumers look for bargains, CEO Michael O’Sullivan said on the earnings.

“In 2022, the lower income shopper has borne the brunt of the impact of inflation,” he said. “As we look forward to 2023, we do not expect that this headwind will disappear, but we think that it should moderate if the level of inflation continues to fall.”

Discounter Dollar Tree wasn’t as fortunate, its shares sliding 7.8% Tuesday even as the chain beat expectations and raised its sales outlook.

“The economy continues to pressure middle- and low-household income customers, resulting in needs-based purchasing,” Dollar Tree CFO Jeff Davis said on his call. “We expect consumables to outperform discretionary, which negatively impacts gross margin.”

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