First-quarter retail gains do not signal a consumer comeback

A Foot Locker, Inc. store.

Courtesy: Foot Locker, Inc.

Retail's biggest Q1 winners aren't booming because consumers suddenly spend more on durable goods. That's because they do well and consumers with little money choose them over competitors.

If there is one conclusion to be drawn from the results published by the largest US retailers in recent weeks, it is that consumers are still spending money, but are much more selective about where.

Bearing the brunt of persistent inflation, high interest rates and an economy that feels tougher than it actually is, consumers are prioritizing purchases that have the right combination of value, convenience and pleasure.

Companies like Abercrombie & Fitch, TJX Companies And Hole impressed Wall Street with their results, while others liked it Kohl's, American Eagle And Goal disappointed.

Take Gap and Foot Locker – two unlikely winners who announced results on Thursday. Both retailers are in the midst of ambitious turnaround plans and are performing better than expected thanks to the new strategies they have implemented.

Gap posted positive comparable sales for the first time in “many years” across all four of its brands — Athleta, Old Navy, Banana Republic and its namesake banner — exceeding Wall Street expectations across the board, the company said.

Gap lost market share to vibrant competitors for years. But under new CEO Richard Dickson, the marketing guru responsible for reviving the Barbie franchise, the clothing chain has focused on financial accuracy, brand storytelling and product development. In less than a year, Gap's sales and profits have improved significantly, and its brands are starting to become part of the cultural conversation again.

A few weeks ago, actor Anne Hathaway attended a Bulgari party wearing a white Gap shirt dress designed by the company's new creative director, Zac Posen. Crucially, Gap showed the $158 dress to consumers, and it sold out within hours. This combination of marketing and exclusive product drops is what Gap has long lacked and what competitors were already doing.

Foot Locker has been in decline in recent years, but with the right combination of new strategies and a little luck, its turnaround is showing signs of life.

Under CEO Mary Dillon, Foot Locker has worked to turn around its stores, where it makes more than 80% of its sales. It has sought to create not only a better shopping experience for consumers, but also a better place for its discerning brand partners.

Instead of two shoe walls with competing brands mixed together, Foot Locker is changing its fleet so that the brands have their own unique displays. The new “store of the future” concept at a New Jersey mall that brings this strategy to life has become the best-performing store in North America in just a few weeks, Dillon told CNBC, adding that brands are enthusiastic about the new design.

The shift couldn't have happened at a better time. After years of Nike's strategy to cut out wholesalers and sell directly to consumers, the retailer realizes it has gone too far and is now changing course.

With updated stores and better product displays, consumers are also converting more and paying full price, even Foot Locker's lower-income shopper.

“Our consumers… this is a category that is very important to them. So if people have discretionary income, it may be limited, but you're still going to prioritize what you spend it on?” 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 makes it attractive, right? So that's where the whole customer experience really matters.”

Elsewhere, Dick's sporting goods released a solid first-quarter report on Wednesday, in which executives said average sales prices and transactions rose and they saw no signs of consumers trading down for cheaper options. That doesn't necessarily mean consumers are spending more broadly, though: Dick's has long been considered a best-in-class operator that offers a solid shopping experience, meaning it can win even if consumers are picky with their spending.

Denim Wars

Denim is having a moment with shoppers. According to a research note from Morgan Stanley, search levels for denim are reaching peaks in a 20-year data set, especially for categories like tops and dresses.

Kohl's misses the mark in a much more meaningful way. The retailer published gloomy figures on Thursday, because both profit and turnover fell far short of expectations. It cut its full-year guidance and shares tumbled more than 20%, the stock's biggest single-day percentage drop ever.

The company's weak results illustrate a challenge the company still faces: racing to keep up with trends and stay relevant.

CEO Tom Kingsbury told CNBC that he expects the head-to-toe denim trend to come into play in the second half of the year, but that the trend could be out of style by the time Kohl's gets around to bringing it to shelves to add.

“Denim is a great business for us. I mean, this isn't really the most important time for denim,” Kingsbury said. 'We sell shorts and T-shirts. And much more, warm weather products.'

Gap—a longtime denim leader—seemed unconcerned about denim falling out of favor as the weather warms. CEO Dickson said the company is getting ready to launch its “exclusive lightweight denim fabric” called “Ultra Soft” in time for summer.

Failure to follow trends is an ongoing problem for aging department store Kohl's. Kingsbury told CNBC in March that Kohl's purchased products 12 to 14 months in advance for the juniors section for teen girls — one of the most trend-driven parts of the stores. When the clothing arrived on the sales floor, it was “dead on arrival.”

In an age where viral TikTok videos dictate the life and death of trends, it's more important than ever for retailers to stay on top of what works and what doesn't for customers. Not only are they competing with older players, they're also competing for customers with innovative but controversial upstarts like China-linked Shein – which can get a product from an idea to its website in weeks.

That is a far cry from the lead times of Under armor, where it currently takes around 18 months to get a product from idea to showroom floor. During an earnings call with analysts on May 16, CEO Kevin Plank called the system “simply uncompetitive in the 2024 landscape” as he laid out a plan to streamline the process.

Meanwhile, Abercrombie & Fitch posted another great set of results, even as it begins to make tougher comparisons. It has shown tremendous growth in part because the company is responsive to its customers and has an agile supply chain that allows it to quickly and efficiently follow trends.

The company posted its strongest first quarter in history and now expects revenue to grow 10% in fiscal 2024, compared to previous expectations of between 4% and 6%.

CEO Fran Horowitz told CNBC that wide, low-rise jeans are also very popular with his customers. While visiting the Hollister store just a short walk from the American Eagle outpost, many of these jeans styles were on display for shoppers as soon as they entered the store.

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