Q1 retail profits don’t mean consumer returns

As they feel the pinch of persistent inflation, rising interest rates, and an economy that appears tougher than it may actually be, consumers are prioritizing purchases that have the right mix of value, convenience and enjoyment.

Companies like Abercrombie & Fitch, TJX Companies and Gap impressed Wall Street with their results, while others like Kohl’s, American Eagle and Target disappointed.

Take Gap and Foot Locker, two unlikely winners that posted results on Thursday. Both retailers are in the midst of ambitious transformation plans and are performing better than expected due to new strategies they have implemented.

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

For many years, Gap has been losing market share to unruly competitors. But under new CEO Richard Dixon, the marketing expert credited with reviving the Barbie franchise, the clothing chain has focused on financial precision, brand storytelling and product development. In less than a year, Gap’s sales and profits improved significantly, and its brands began to be part of the cultural conversation again.

A few weeks ago, actress Anne Hathaway went to a Bvlgari party wearing a white Gap shirt dress designed by the company’s new creative director, Zac Posen. More importantly, Gap dropped the $158 dress to consumers, and it sold out within hours. This combination of marketing and dropping exclusive products is what Gap has been missing for a long time, and what competitors were already doing.

Foot Locker’s value has declined over the past couple of years, but with the right mix of new strategies and a little luck, its turnaround is showing signs of life.

Under CEO Mary Dillon’s leadership, Foot Locker has transformed its stores, where it does more than 80% of its sales. It has tried to create not only a better shopping experience for consumers but also a better place for its important brand partners.

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

This transformation could not have come at a better time. After years of Nike’s strategy of cutting out wholesalers and selling directly to consumers, the retailer has realized it has gone too far and is now changing course.

And with revamped stores and better product offerings, consumers are also converting more, paying full price — even low-income Foot Locker shoppers.

“Our consumers…that’s a very important category to them. So when people have discretionary income, it may be limited, but you’re going to prioritize where you spend it, right?” Dillon said. “We’re proving that people are willing to spend full price, but you have to have the right products and present them in a way that makes them attractive, right? So, the whole customer experience is really important.”

Elsewhere, Dick’s Sporting Goods posted a strong first-quarter report on Wednesday, with executives saying average selling and transaction prices rose and they saw no signs of consumers trading up for cheaper options. That may not mean shoppers are spending more widely, though, as Dick’s has long been considered a best-in-class operator that delivers a solid shopping experience, meaning it can win even when consumers are selective in their spending.

Two retailers that didn’t have good quarters — American Eagle and Kohl’s — tell a story of missing trends or poor execution.

American Eagle easily beat earnings estimates thanks to a new strategy designed to boost profitable growth, but it missed revenue and issued cautious guidance that fell slightly short of Wall Street expectations.

Jennifer Foyle, American Eagle’s president and executive creative director, told CNBC that the brand is working to weed out items that don’t land with shoppers and research existing items. She said the retailer was overly focused on leggings in the past, but now baggy, low-rise pants are in.

During a visit to a store at American Dream Mall in New Jersey on Thursday, an associate told CNBC that the location did not have low-rise, loose stores and was only available online. At the same time, there was a wall of two men. However, denim was a strong performer for the company during the quarter, and it had a variety of other styles that resonated with customers on site, the company said.

Denim is having a moment with shoppers. Search levels for denim peaked in a 20-year data set, especially for categories like shirts and dresses, according to a Morgan Stanley research note.

Kohl’s misses the mark in a much more meaningful way. The retailer posted dismal numbers on Thursday, with profits and revenue falling well below expectations. It cut its full-year forecast and its shares fell more than 20%, the largest single-day percentage drop ever.

The poor results highlighted the challenge the retailer still faces: keeping up with trends and staying relevant.

CEO Tom Kingsbury told CNBC that he expects the “head-to-toe” denim trend to play a role in the back half of the year, but it may already be out of fashion by the time Kohl’s starts adding apparel elements to its products. shelves.

“Denim is a good business for us. I mean, it’s really not the most important time for denim,” Kingsbury said. “We sell shorts and T-shirts. And more, you know, warm-weather products.”

Gap, a longtime denim leader, doesn’t seem concerned about denim losing popularity as the weather warms. CEO Dixon said the company is preparing to launch an “exclusive lightweight denim” called “Ultra Soft” in time for summer.

Failure to chase trends has been a persistent problem for the legacy Kohl’s store. Kingsbury told CNBC in March that Kohl’s used to purchase product for the juniors section that caters to teenage girls — one of the most trend-driven areas of its stores — 12 to 14 months in advance. When the clothes arrived on the sales floor, they were “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’s working with customers and what’s not. Not only are they competing with legacy players, they’re also competing for customers with innovative and controversial startups like China-linked Shein, which can go from an idea to an online product in a matter of weeks.

This is a far cry from the lead times at Under Armour, where it currently takes about 18 months to take a product from concept to showroom. During an earnings call with analysts on May 16, CEO Kevin Plank described the system as “uncompetitive in the 2024 landscape” as he laid out a plan to streamline the process.

Meanwhile, Abercrombie & Fitch posted another set of excellent results, even as it began making more stringent comparisons. It recorded strong growth due in part to the company being responsive to its customers and having a nimble supply chain that allowed it to chase trends quickly and efficiently.

It posted its strongest first quarter in history, and now expects sales to grow 10% in fiscal 2024, up from previous guidance of between 4% and 6%.

CEO Fran Horowitz told CNBC that the baggy, low-rise jeans are also very popular with his customers. During a recent visit by CNBC to its Hollister store just a short walk from the American Eagle location, shoppers were shown much of this style of jeans as soon as they entered the store.