July: Will Back-to-School Consumer Spending Fall along with U.S. Debt Rating?

Download PDF Version

July sales were relatively healthy, but performance was uneven across sectors. Luxury and club/discounters continued to shine, but some specialty retailers struggled to meet expectations. Overall, it was a positive start for Back-to-School but there are signs of tough times ahead for the balance of the season.

First, we dug deeper into the July numbers. July is a transition month, with sales driven by summer clearance and first arrivals of the BTS season*. Many retailers benefited from the record-breaking temperatures in July that drove demand higher for their summer markdowns. There also was the added benefit of July 2011 having 5 Fridays, 5 Saturdays, and 5 Sundays (LY had 5/5/4). An incremental weekend day typically drives about 1.0-1.5% in sales. So, while July was strong for retail comps, there were several factors that drove the numbers.

Second, we decided to analyze last year's BTS season to see what some retailers are up against in terms of comps. The chart to the left displays a comparison of last year with July 2011 results.

You will see that there are a handful of retailers at the top of the list that had a high bar from last year and posted strong gains once again. The luxury stores which capitalized on the benefits of a strong stock market could have turbulence ahead given recent market trends and risks.

The retailers that had comps last year of 2.0 - 4.0% are continuing to see mixed results. This group is comprised heavily of mid-tier and mass retailers. Some may say that this group is "stuck in the middle" and needs to ensure the Back-to-School consumer sees them as offering a highly compelling offering when compared to fashion specialty stores.

The third grouping of companies was relatively flat last July and continues to struggle.

The fourth grouping has an easy bar from last year. Some junior specialty stores and regional department stores appear to be gaining traction.

Last, and most important, let's discuss the headwinds facing the consumer for the balance of the season. The consumer has proven to be resilient in 2011, but how much more can they take? The macroeconomics we are starting August with are far worse than what we saw as July began. There is a lot of downward pressure that will continue to test consumer confidence.

1. Unemployment remains high (9.1%), keeping many shoppers on the sidelines and maintaining downward pressure on consumer confidence
    
2. Gas prices remain high (up 30-35% over July 2010), which continues to put pressure on low and middle-income families. Some relief appears to be developing in August, so perhaps some of these consumers will feel better about spending as we move through the BTS period.
    
3. Talk of double dip recession is getting much louder – GDP growth has been below modest expectations. Uncertainty surrounding Europe and concern about the financial rating of U.S. debt drove markets lower, with the DOW losing all of its 2011 gains. Will this cause the luxury consumer to pull back in the second half of the year?
    
4. US debt downgraded from AAA to AA+. We'll have to wait and see what the impacts will be on consumers. Potential of higher interest rates on mortgages, car loans and credit cards would likely impact consumer discretionary spending.
    
5. Price standoff between retailers and consumers will heat up as most Fall deliveries have the full impact of cotton price inflation.

All of this has resulted in a cautious consumer - the University of Michigan Consumer Sentiment Index is at its lowest level since March 2009. Current market turmoil and the current political battles in Washington could drive sentiment (and consumer spending) even lower.

The potential fallout for retailers? We could be in for a highly promotional fall.

As always, our complete data pack of retailer and macroeconomic data is attached. Follow this link to download the AlixPartners Comp Sales Report for July 2011.

For comments and additional information, please reply to retail@alixpartners.com

*BTS (Back-to-School) selling period includes July, August and September

Download PDF Version