Consumers Have Strained From Non-Necessity Retailers

Recent retail earnings showed a good deal of doom and gloom signs of a weakened consumer spending.  Both Macy’s Inc M and Nordstrom Inc JWN saw falling digital sales. Even the inventive stylist retailer Stitch Fix Inc SFIX has a lot of undoing to do as initiatives designed to fuel growth have only undermined its performance. Kohl’s Corporation KSS also seems to have dropped off many shoppers’ lists as retailers struggled with using promotions to get rid of excess inventory. The Gap Inc GPS saw its full year 2023 revenue drop 6.3% to $15.6 billion as it made a loss of $202 million which is a decline of 179% compared to its FY 2022’s profit, with the EPS resulting in a loss of $0.55 per share that missed EPS analyst estimates by as much as 124%. But as always, there’s more to the story than tightened consumer wallets.

Stich Fix’s Growth Strategy Backfired

Over the first quarter of fiscal 2022, Stitch Fix had 4.18 million active clients, but by the end of the year, that core metric dropped to 3.8 million, and it dropped further to 3.57 million active clients as it closed up the second half of the fiscal 2023. Over the latest report, second fiscal quarter of 2023, its net revenue per active client dropped to $516 while during last year’s comparable quarter, it amounted to $553. Therefore, its fiscal 2022 revenue decline 1%, its first drop since the company went public with the first half of fiscal 2023 seeing a revenue drop of 21% YoY to $868 million.

Stitch Fix’s outlook is dismal compared to other traditional apparel retailers like Abercrombie & Fitch Co ANF and American Eagle Outfitters Inc AEO, which both expect to grow their revenues by about 2% this year and even compared to The Gap Inc GPS who expects revenue to decline by 5% despite all of its recent troubles.

Founder and former CEO Katrina Lake stepped in as interim CEO and blamed its troubles on a "complicated macroeconomic environment and tighter client wallets", along with Apple Inc AAPL's privacy update for iOS that disrupted the efficiency of the company’s personal stylist features.

Stitch Fix will be focusing more on its core service - the subscription model

As ambitious goals resulted in a loss of focus, Lake vowed to and return to the company’s core value that pairs algorithms and human stylists to create outfits for customers who subscribe to the service on a frequency of their choosing. A complicated business model makes it difficult to identify problems and this model has been ditched by many, such as Nordstrom, so it remains questionable how will Stitch Fix grow profitably and achieve the desired scale. Fortunately, the company whose model is heavily dependent on technology has its strengths, such as a favorable cash position that are result of recent restructuring.

Macy’s Promotions Thinned Margins

For the fourth quarter ended in January, Macy’s saw its digital sales drop 9%, despite being 24% higher compared to 2019’s quarter. Brick-and-mortar store sales dropped only 2% YoY, with net sales down 4.6% YoY as they amounted to $8.3 billion.

Gross margin dropped to 34.1%, compared to 36.5% from last year’s comparable quarter due to heavier markdowns and promotions that were part of its commitment to end 2022 with the right level of inventories at the right level and composition. Net income dropped from 2021’s $742 million to $508 million.

CEO Jeff Gennette expects discretionary spend to be under pressure as spending moves toward services and essential goods, but demand for gift-giving and occasion-based products to remain strong.

Nordstrom Rack is facing similar struggles

Like Macy’s, Nordstrom saw its digital sales for the fourth quarter ended in January drop 13% YoY, making 40% of total sales for the quarter with net sales dropping 4.1% to $4.2 billion.

In an inflationary climate, discount rivals such as Ross Stores Inc. ROST have gained shoppers, but Nordstrom’s discounted Rack business saw its market share shrink as sales remained below prepandemic levels. Rack sales dropped 8.1% in the quarter compared to a 2.4% drop at the Nordstrom-banner stores. But 20 Rack stores are still due to be opened in spring and these locations are less expensive to build compared to traditional department stores. With a reduction of merchandise and the winding down of its Canada operations, 2023’s performance is expected to improve.

On the other hand, sporting goods retailers are in great shape

Last Tuesday, Dick's Sporting Goods Inc DKS smashed same-store sales expectations as it reported fourth quarter results and guidance that were well above expectations, largely due to efficient inventory management just in time for the busy spring season.

It’s not easy being a non-necesity retailer in a inflationary post-pandemic macro-environment.

Even big shots like Walmart WMT and Target TGT find that consumers have strained. Basically, retailers from the ‘affordable’ category that do not sell food and necessities are trapped in an uncomfortable middle ground between discount and high-end retailers, leaving them particularly vulnerable to shifting spending patterns that keep changing in this dynamic filled with uncertainty and persistently high inflation that is biting into consumers' pockets.

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.