(Reuters) - Even with consumer confidence at a six-year high, retailers ranging from Target Corp TGT.N to Macy's Inc M.N are competing not only with each other but are also having to adapt to shifting spending patterns.
Many consumers are taking advantage of still-low interest rates, purchasing cars and houses, but at the same time they are holding back on shirts, dresses and shoes, which doesn’t bode well for many retailers in the run-up to the year-end holiday season.
“People are putting their money into things that will last,” said Jill Puleri, IBM’s global industry leader for retail. “If you look at appliances, if you look at jewelry, these are not necessarily small purchases. They’re rewarding each other ... They’re putting money where things are more stable.”
IBM expects U.S. appliance sales to rise 6 percent in the current third quarter, with sales of other home goods up 1.67 percent. For the holiday season, it expects appliance sales to rise 2.13 percent and sales of home goods to rise 1.98 percent, while anticipating the steepest decline, 3.62 percent, in men’s apparel.
That's good news for companies such as home improvement chains Home Depot Inc HD.N and Lowe's Cos Inc LOW.N, which reported strong quarterly results and raised their fiscal year forecasts as people spruced up their homes.
In contrast, Macy's, Kohl's Corp KSS.N, Wal-Mart Stores Inc WMT.N, Target Corp TGT.N and even luxury chains such as Saks Inc SKS.N and Nordstrom Inc JWN.N posted disappointing second-quarter sales in recent weeks, and many aren't hopeful about the holidays.
"As people are spending more money on their cars and homes, they are cutting back elsewhere, such as their spending on items like clothes and shoes," Sears Holdings Corp SHLD.O Chairman and Chief Executive Edward Lampert told Reuters in an interview.
Macy’s, which gets about 80 percent of sales from clothing, lowered its sales forecast for the year after it noticed spending shifting away from what department store chains offer.
"The problem now is that there is no fashion, and if there is no newness, clothing becomes a commodity," said Patty Edwards, chief investment officer of Trutina Financial, which sold Nordstrom earlier this year, but owns Michael Kors Holdings Ltd KORS.N, PVH Corp PVH.N and Nike Inc NKE.N. "Beyond a select few, I'd think twice about getting into apparel and retail stocks."
Some of the biggest hedge funds are shifting out of the sector. An analysis of holdings in the most recent quarter of the top 30 hedge funds by Thomson Reuters shows consumer discretionary stocks suffered the third biggest decline in the period, falling 2.15 percent. Only energy and materials had larger declines, at 5.25 and 11.59, respectively. The research shows that money shifted into healthcare, telecoms and technology stocks.
POTENTIALLY WEAK HOLIDAY SALES
While interest rates have risen sharply in the last few months, they remain low by historical standards, and many consumers are opting to buy now ahead of any potential increase.
“Consumers recognize that financed purchases will be more expensive with rising rates, and thus are prioritizing them in the current economy,” said Erich Patten, portfolio manager at Cutler Investment Group LLC in Seattle. “Demand for soft goods will return as interest rates rise and purchasing patterns normalize.”
Since early May, mortgage rates for 30-year loans have risen more than a percentage point. U.S. home resales jumped in July to their highest level in over three years, and some of that surge may reflect buyers rushing to lock in rates before they rise further.
Still, data showed that sales of new, single-family homes plunged to their lowest level in nine months last month, casting a shadow over the U.S. housing recovery.
Auto sales to U.S. consumers beat expectations in July and major automakers reported low inventories for many hot-selling models, suggesting sales would strengthen further.
The near-term spending in housing and automotive sectors "is crowding out other spending," Target Corp TGT.N Chairman and CEO Gregg Steinhafel said on an August 21 call. He said that his chain sees "a mix of signals in which emerging optimism is balanced with continuing challenges."
Consumers are also feeling the pinch of payroll taxes that are 2 percentage points higher this year, as well as slightly higher gas prices, leading them to cut back on discretionary items.
“You can’t get out of paying your taxes and you have to have gas to go to work and school. Those are real numbers that really do impact real Americans, and I think that’s where other discretionary spend takes a hit,” said Alison Paul, vice chairman and U.S. retail and distribution leader at Deloitte LLP.
According to a poll of 1,100 U.S. consumers by Ipsos for Reuters this month, 26 percent plan to spend less on clothing this holiday season, while only 12 percent say they expect to spend more.
A few retailers, including Ann Inc ANN.N, posted a rise in quarterly comparable store sales this week.
“We’re not saying run away from apparel,” said Shawn Kravetz, president of Esplanade Capital. “We’re saying you have to make sure it really looks good on you. Investors just have to be choosier than ever because it has gotten very messy and very challenging very quickly.”
Reporting by Jessica Wohl in Chicago and Phil Wahba in New York. Additional reporting by Jason Lange in Washington, Dhanya Skariachan in New York; Editing by Jilian Mincer and Ken Wills
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