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This week, US retailers were in the spotlight as Abercrombie & Fitch, Nordstrom, American Eagle, Gap and Target all reported fourth-quarter earnings. Results were a mixed bag — proving that the US customer is more discerning than ever, both in taste and wallet spend.
The breakdown
Abercrombie & Fitch’s most unlikely rebound continues. The one-time mall brand reported high growth in the fourth quarter, with sales up 21 per cent year-on-year, marking its fifth consecutive quarter of growth. Competitor American Eagle also saw gains, up 2.2 per cent year-on-year. Target was up 1.6 per cent; Gap Inc sales rose 1 per cent. All four beat analyst expectations. Nordstrom, meanwhile, saw sluggish sales, with a 10 per cent decline year-on-year.
These mixed results are an indicator of the ongoing pressures facing US consumers, who are having to be increasingly selective about where to spend their dollars, experts say.
“While there are some encouraging signs in the economy, there are also stubborn pressures impacting families and retailers,” Target chief growth officer Christina Hennington said on Tuesday. “Consumers say they still feel stretched.”
They’re also an indicator of what is working with today’s customers in the US. Brands with a clear point of view and accessible price point are edging out less agile competitors.
“The results tell us that the American consumer remains under pressure and is more selective in their buying behaviour,” says Neil Saunders, managing director and retail analyst at analytics firm Globaldata. “This is producing polarisation in retail results with good retailers still able to generate growth, while others are struggling to lift sales. This is not an environment in which everyone wins.”
Revenge of the mall brand
Abercrombie’s hot streak signals that its ongoing rebrand under CEO Fran Horowitz, who joined in 2017, is working. In a note to clients, Citi retail analyst Paul Lejuez said the quarter was “outstanding”. William Blair analyst Dylan Carden notes structural growth that “is more sustaining than just being a hot brand for a moment” — though says there’s some of that in the brand’s success story, too.
“Our playbook is working,” Horowitz said during Wednesday’s earnings call. “We have been able to expand the addressable market for Abercrombie — adults particularly. So it is no longer a jeans and T-shirt company. It is truly a lifestyle brand,” she said. “The addressable market has gone from the early 20s to easily through late 30s, and we’ve broadened the offerings from a category perspective.”
American Eagle, while quieter than Abercrombie, also performed well. In 2024, the company is banking on growing its namesake brands and steering its brands (including Aerie and Offline) towards higher margin products like athleticwear.
Abercrombie and American Eagle both offer affordable apparel, but price point isn’t the main reason for their success, Saunders says. “This comes down to the fact that both are very focused on the customer and have good assortments that consumers want to buy into. The frequency of range refreshes, the focus on quality and good design keeps consumers coming back to both retailers.”
As well as being price-conscious, consumers are trend-focused, says Rachel Wolff, retail and e-commerce analyst at Emarketer. “The strong performances of Abercrombie and American Eagle — as well as the incremental progress Gap is making on its turnaround — show that customers are gravitating toward retailers that can deliver a steady flow of new, on-trend merchandise,” she says. “Both companies also owe their successes in part to a playbook that focuses heavily on providing experiences and assortments that meet the needs of their core consumers, enabling them to build brand loyalty and drive sales.”
Gap is on its way to achieving the same, experts say. “Our view is that each brand under the portfolio has the potential to gain share in the apparel market, but each brand needs to be more relevant to consumers by skillfully marrying on-trend merchandise with creative marketing,” TD Cowen managing director Oliver Chen said in a note on Friday.
By brand, Old Navy (where Gap’s new EVP and creative director Zac Posen will double as chief creative officer) and Gap were the best performers. Old Navy sales were up 2 per cent and Gap sales were up 4 per cent. Banana Republic sales, on the other hand, were down 4 per cent and Athleta sales were down 10 per cent.
Both Abercrombie and American Eagle may have performed well, but by Thursday, Abercrombie shares were down 5.3 per cent and American Eagle’s down 1.9 per cent. William Blair’s Carden puts the former down to decline stemming from speculation around continued A&F brand growth and Hollister recovery — but notes that the company still sees further support for shares. Gap shares, on the other hand, rallied; they were up 1.42 per cent on Thursday evening.
Multi-brand retailer woes
Nordstrom fared worse than its affordable apparel counterparts, though it did beat analyst expectations. Shares fell on the retailer’s muted 2024 outlook. Nordstrom Rack, the company’s off-price arm, was the strongest performer of the quarter, up 14.6 per cent. Nordstrom said on Wednesday that the plan is to capitalise on Rack’s momentum and open more stores in the year ahead.
“We are most encouraged on better performance at Rack (34 per cent of full-year net sales), which inflected positively to 15 per cent year-on-year on improved inventory productivity, traffic, and conversion,” Chen said in a note on Wednesday.
That Rack had the upper hand — and Target did well — reflects consumers’ tightened budgets, Saunders says. “The strong performance at Nordstrom Rack, alongside the generally good growth at other off-price players, shows that shoppers are in value-seeking mode. People are migrating to lower priced options to make their budgets stretch further.”
In a bid to capture this spend, Target announced a new annual membership service. For now, the only perk is unlimited same-day delivery. Will this be enough to draw new consumers in?
“[It’s] a reasonable starting place, but it is not particularly compelling or interesting to anyone who doesn’t already order a lot from Target online,” Saunders says. “I can’t see loads of people forking out an annual subscription just for free shipping — especially when so many households already get this from Amazon Prime. Target will need to add a lot more bells and whistles to grow the programme.”
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