Gap and Foot Locker’s strong performance doesn’t mean consumers are recovering

The biggest winners in retail’s first-quarter earnings are thriving not because consumers suddenly increased their spending on discretionary items, but because they’re running well and cash-strapped shoppers are choosing them over competitors.

If there’s one thing that can be taken from results released by major U.S. retailers over the past few weeks, it’s that shoppers are still spending money, but they’re becoming much more careful about where they shop.

Battered by high inflation, high interest rates and a tougher-than-expected economy, consumers are prioritizing purchases that offer the right combination of value, convenience and enjoyment.

Companies like Abercrombie & Fitch, TJX Companies and gap As a result of impressing Wall Street, Coles, American Eagle and the goal It was a shame.

Take the gap, Foot Locker Two surprise winners reported earnings on Thursday. Both retailers are in the midst of ambitious turnaround plans and are outperforming expectations thanks to the new strategies they’ve implemented.

Gap Inc. said all four of its brands — Athleta, Old Navy, Banana Republic and its namesake banner — reported positive same-store sales for the first time in “many years,” generally beating Wall Street expectations.

For years, Gap has lost market share to more topical competitors, but under new CEO Richard Dickson, a marketing guru credited with reviving the Barbie franchise, the clothing chain has focused on financial discipline, brand storytelling, and product development. In less than a year, Gap’s sales and profits have improved dramatically, and its brands are once again becoming part of the cultural conversation.

A few weeks ago, actress Anne Hathaway attended a Bvlgari party wearing a white Gap shirtdress designed by the company’s new creative director, Zac Posen. Significantly, Gap offered the $158 dress to consumers, and it sold out within hours. This combination of marketing and selling limited edition items is something Gap has lacked for a long time and is something its competitors have been doing.

Foot Locker has been in decline for the past few years, but thanks to the right combination of a new strategy and a little bit of luck, it’s showing signs of recovery.

Under CEO Mary Dillon, Foot Locker has been working to reinvent its stores, which generate more than 80% of its sales, as the company seeks to create not only a better shopping experience for consumers, but also a better place for its valued brand partners.

Instead of displaying competing shoe brands on two walls, Foot Locker is shifting its product lineup so that each brand has its own space. The company’s new “Store of the Future” concept, which opened in a New Jersey mall, has brought this strategy to life and become the best-performing store in North America in just a few weeks, Dillon told CNBC, adding that brands are ecstatic about the new design.

The shift comes at just the right time: After years of Nike’s strategy of cutting out wholesalers and selling directly to consumers, the retailer has realized it went too far and is now changing course.

The redesigned stores and improved merchandise presentation also increased consumer confidence, encouraging even Foot Locker’s lower-income shoppers to buy at full price.

“Our consumer… it’s a category that’s really important to them. When people have limited disposable income, they’re going to prioritize where they’re going to spend their money,” Dillon said. “We’ve proven that people are willing to pay full price, but you’ve got to have the right product and present it in a way that makes it look compelling, right? So that’s where the whole customer experience really matters.”

Elsewhere, Dick’s Sporting Goods The company released a strong first-quarter report on Wednesday. Executives said average sales prices and transaction values ​​rose and there were no signs that consumers were trading up for cheaper options. But that doesn’t mean consumers are broadening their spending. Dick’s has long been considered a best-in-class operator that offers a solid shopping experience, meaning the company can win even when consumers are picky with their spending.

Two retailers that performed poorly: American Eagle and Coles — Tell a story about poor execution or missed trends.

American Eagle Corp. sharply beat earnings expectations thanks to a new strategy to drive profitable growth, but sales missed expectations and the company issued cautious guidance that was slightly below Wall Street expectations.

Jennifer Foyle, president and executive creative director at American Eagle, told CNBC that the brand is cutting back on products that aren’t getting customers’ love and focusing on products that are. She said the retailer placed too much emphasis on jeggings in the past, but that low-rise, looser fits are now in style.

During a visit to the store at New Jersey’s American Dream Mall on Thursday, a sales associate told CNBC that the low-rise, relaxed-fitting items were not available in stores and were only available online, while jeggings lined the walls. Still, the company said denim was a strong seller for the company during the quarter, and that stores had a variety of styles that resonated with customers.

Denim is gaining popularity among shoppers: Search levels for denim are at their highest in the 20-year data set, especially in categories like tops and dresses, according to a Morgan Stanley research note.

Kohl’s has missed the mark in a much more significant way. The company reported dismal earnings and sales figures on Thursday that fell far short of expectations. It lowered its full-year outlook, and its shares fell more than 20%, its biggest one-day drop in the company’s stock on record.

The weak results highlight the challenge retailers still face: keeping up with trends and staying relevant.

CEO Tom Kingsbury told CNBC he expects the “head-to-toe” denim trend to become big later this year, but that by the time Kohl’s gets the clothes in stores, they may already be out of fashion.

“Denim is a decent business for us. It’s just not a big time for denim right now,” Kingsbury said. “We sell shorts, we sell T-shirts, we sell other warm weather stuff.”

Gap, a longtime leader in denim, doesn’t seem worried that denim will lose popularity just as the weather gets warmer: Dixon said the company is preparing to launch a “proprietary lightweight denim fabric” called “Ultra Soft” just in time for summer.

Not keeping up with trends has been a continuing problem for the aging department store. Kingsbury told CNBC in March that Kohl’s used to buy merchandise for its juniors department, one of the most trend-sensitive areas of its stores, 12 to 14 months in advance. When the apparel hit the shelves, “it didn’t sell as quickly as it arrived.”

In an age where TikTok videos can make or break a trend, it’s more important than ever for retailers to stay on top of what works and what doesn’t with customers. Retailers are not only competing with incumbents, but also with innovative but controversial startups like China-based Shein, which can take you from idea to online product in a matter of weeks.

this is, Under ArmourIt currently takes the company about 18 months to go from idea to product on the showroom floor, and on a May 16 earnings call with analysts, CEO Kevin Plank called the system “completely uncompetitive in the 2024 marketplace” and laid out plans to streamline the process.

Meanwhile, Abercrombie & Fitch has once again delivered strong results, even as it starts to catch up with tough comparisons. The company’s rapid growth is due in part to its sensitivity to customer needs and an agile supply chain that allows it to follow trends quickly and efficiently.

The company reported its best first quarter on record and raised its guidance for fiscal 2024 sales growth to 10% from a 4% to 6% increase.

CEO Fran Horowitz told CNBC that loose, low-rise jeans are also popular with customers, and on a recent visit by CNBC to a Hollister store just a short walk from the American Eagle branch, there were plenty of those styles on display as soon as you walked in.