Retail suffers as millennials get serious

July 19, 2016 01:00 PM

Is buying clothes and accessories passé? That question was on retail sector analysts’ minds during the first half of the year as certain retailers really bit the dust during Q1 earnings season. Yes, clothing is a basic necessity, but the trends in consumer spending are shifting away from apparel and accessories toward cars, homes, technology and health care. Millennials in particular want less stuff, and would rather allocate discretionary income to the latest phone or fitness tracker. 

This does not bode well for department stores. Names like Macy’s (M) and Nordstrom (JWN) both missed on the top-line and saw profits and revenues fall year-over-year in Q1. On the lower-end, JCPenney (JCP) saw an earnings per share increase of 44% from the year-ago period, as consumers become more value-focused. Not all of the more affordable department stores realized the same fate, however, with Kohl’s (KSS) doing just as poorly as its higher-end peers. Many  retailers blamed unseasonably warm winter weather forcing deep discounts to push inventory. There is also the issue of waning mall traffic, where many of these retailers are located, as e-commerce increases in popularity. Off-price department stores fared the best in this group, with TJX companies (TJX), parent of Marshalls, TJMaxx and HomeGoods, putting up the best fundamentals of the group. 

The accessories space still remained under pressure during the first half of the year. All of the handbag retailers, including Michael Kors (KORS), Kate Spade & Co. (KATE) and Coach (COH), showed top and bottom-line improvements in Q1on a year-over-year basis. 

Watchmaker Fossil Group Inc. (FOSL), which has a portfolio of licensed brands that includes Michael Kors, Kate Spade and Burberry (BRBY), has been hit hard by weakness in timepiece sales. However, the company’s core brands, Fossil and Skagen, which come at more modest price points, have performed relatively well, aided by strong e-commerce growth.

Many winners in 2016 are the producers of large ticket items. Specifically, autos, homebuilders and home improvement retailers. U.S. motor vehicle sales have cooled a bit from the record levels seen at the end of 2015, but are still managing to stay around the 17 million mark, a nice improvement from a year earlier. 

Homebuilders like Lennar Corp. (LEN) and DR Horton (DHI) posted double-digit growth this quarter, with most strength coming from the Southern and Western regions of the United States ahead of the peak home-buying season. As the prices of homes remain high, home improvement retailers also get a bump as price appreciation is directly correlated with consumer investments into properties. We’ve seen this with both Home Depot (HD) and Lowe’s (LOW), which raised full-year 2016 guidance after posting solid Q1 results. 

Athletic apparel and beauty segments of retail are also doing extremely well. The trend towards athleisure wear has helped old stalwarts like Nike (NKE) as well as younger brands such as Under Armour (UA) and Lululemon (LULU). But there might be trouble in paradise, as Under Armour issued a sales warnings for Q2 in June and Morgan Stanley downgraded Nike stock. 

Beauty is holding strong and appears to be carrying  many of the department stores. Macy’s, which bought special beauty brand BlueMercury in 2015, and JCPenney (which has ramped up its in-store Sephora counters) both reported their respective beauty businesses as some of best performing of all areas in Q1. Ulta Salon (ULTA) also crushed results last season, which lead to the stock soaring 8% in the aftermarket. 

As consumer preferences continue to change, retailers will have to pivot their focus to those segments that are working, such as tech, athletic apparel and beauty, if they want to succeed in the current environment.

About the Author

Christine Short is a senior vice president at Estimize. An expert in corporate earnings, she produces content highlighting Estimize data. Prior to Estimize, Christine held positions at Thomson Reuters and S&P Capital IQ. @Estimize