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Quarterly sales analysis: Q2 2015 performance and industry outlook

CONSUMER PRODUCTS INSIGHTS  | 

Even with some positive economic indicators, retailers generally struggled in Q2, although there may be light at the end of the tunnel. Multiple key promotions were delayed into Q3, and some retailers are adjusting strategies to the needs of an evolving customer base. Jeffrey B. Edelman, RSM director, consumer products industry, and former industry analyst, discusses the challenges many companies faced in the second quarter, how some retailers overcame them, and what factors can help contribute to success in the third quarter.

Retailers are still struggling: Consumer spending improved as Q2 progressed, reflecting higher job growth, wages and lower fuel prices. Unfortunately, much of the improvement was seen in sales of cars and building supplies, and spending at restaurants. Home Depot and Lowe's again reported strong gains. However, retail sales at electronics and department stores slowed, while grocery store spending was flat.

Several factors contributed to retailers' disappointment, including:

  • Tax-free holiday sales shifting into 3Q this year from 2Q last year
  • Promotions being more carefully managed, both in terms of length and rate of markdowns
  • Reduced tourist spending due to the stronger U.S. dollar
  • Deflation in the average ticket price reflecting lower merchandise costs or shift in distribution channel

On the positive side, retailers are boosting sales through product innovations, as well as omnichannel and technology investments. Many are managing wage costs; nevertheless, profitability for most retailers reporting earnings remained under pressure for another quarter. Technology investments and other costs to remain competitive will likely continue to negatively affect margins going forward. While a number did beat expectations, this was a function of very modest forecasts and conservative guidance.

The basic business remains a drag: E-commerce continued to generate impressive gains, helping lift overall comparable store sales for most. However, Macy's, one retailer that has generally had a good pulse on the consumer and managed its business well, was perhaps one of the most surprised with their soft sales.

Accessories and some luxury brands, which have been strong performers, were highlighted as being soft and reflective of the consumer holding back or unexcited about product offerings. Some stores noted there appeared to be some light at the end of the tunnel for apparel, reflecting improved results in the quarter, although these were limited.

JCPenney was one of the clear standouts, as it is beginning to show more positive results against its low base, whereas Kohl's management sounded a bit frustrated over its results. Nordstrom posted one of the strongest sales increases at 9 percent overall, driven by its new businesses, and 4.9 percent in its comparable store sales, helped by e-commerce and Nordstrom Rack. Excluding these, the comparable number would have been closer to flat, still an impressive performance relative to its peers.

Erosion in the average ticket price continues to reflect consumers' ongoing focus on value through frequenting discount outlets to purchase branded merchandise. The value retail space keeps gaining new entrants, with many opening this fall, including Macy's Backstage, Primark and J. Crew Mercantile, not to mention ongoing growth of fast fashion participants such as Zara and H&M. Finally, lower average unit costs are expected for 2H15 that could continue into next year.

The channel shift was most noticeable in the sales increase at TJX, while Target's remerchandising is beginning to have a positive impact. Similar to Penney, Target also had easy comparisons. Sears Holdings appeared to be the biggest market share donator, sustaining its string of declining comparable store sales.

There is some hope for Q3:  Economists saw signs of a steadier economy in the July spending numbers that bode well for the last half of the year. Ongoing signs of consumer strength could begin to outweigh some of the previously mentioned factors affecting recent results. Employment growth and wage gains should be among the biggest contributors to sales growth, but it is hard to project a significant shift in consumer spending patterns from recent quarters.

Delayed back-to-school promotions and sales tax holidays should begin to kick in. Inventories, for the most part, appear to be on the high side, suggesting some promotions pared back in Q2 might be reevaluated. There appears to be more newness in apparel (including denim) that could rekindle consumer interest. In addition, sales trends in athletic footwear and active wear (yoga pants and sports bras) remain strong, suggesting these categories could generate further fashion interest.

New, and extension of recent initiatives, could be additive to some: In an attempt to boost sales, Target will soon test a grocery delivery service, Macy's will experiment with same-day delivery in selected markets, and Kohl's will implement click-and-collect initiatives in some markets.

On the negative side, end of 2Q inventories seem high: Nevertheless, many retailers stated the current level reflects the anticipated sales pick-up from the delayed free sales tax promotions and the ongoing influence of "wait and see what the other kids are wearing." Vendors' orders are set for the rest of the year; however, the margin impact will depend on the rate of sell-through over the next few months and "realized" margin. There is probably more margin vulnerability for all, as sales could match expectations, but could also be driven by increased promotions if needed.

Jeffrey B. Edelman is director of consumer products industry services for RSM, and is located in the firm's New York office. He routinely advises senior management of companies operating in the consumer and retail sectors on strategic, sourcing, financial, marketing and distribution issues. He also works closely with internal teams on matters such as new business development, transactional advisory, including due diligence and tax. Jeff can be reached at 212.372.1225, or via email at jeff.edelman@rsmus.com.

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