With economic concerns on the rise, retailers are gearing up to report earnings for the third quarter this week.
Skechers, VF Corp., Deckers and Boot Barn will report their results this week, with Crocs, Under Armour and Steven Madden slated for the following week. This quarter, headwinds in the economic environment such as inflation, inventory excesses and recession fears are likely to weigh on results.
Here’s what to expect:
Inventory excesses
In Q2, retailers like Target and Walmart announced measures to clear through higher-than-usual inventories. such as increasing markdowns in their stores, especially in categories like apparel. Across multiple retailers, these excesses will likely continue to weigh on Q3 results.
Adidas last week once again cut its outlook for 2022 and said inventory excesses in Western markets and more promotional activity will impact the company in the back half of the year.
Overall, retailers expect the inventory build up to last through 2023.
Foreign exchange headwinds
A strong U.S. dollar is having broader impact on brands and retailers. U.S. importers benefit from a strong U.S. dollar, because purchases from overseas are less expensive compared to in the U.S. But American brands that export their products to other countries are likely to face the headwinds from poor foreign exchange rates.
For example, the U.S.-based Nike in September noted the impact of foreign exchange challenges in its earnings report for Q1 and expects an 800 basis point hit in fiscal year 2023.
According to a Monday note from Cowen analyst John Kernan, Q4 will see the most impact from FX headwinds but said that “there could be lingering pressure into Q3 next year.”
“This puts FX transactional pressure potentially into 2024 which is unaccounted for,” Kernan wrote. “European exposure remains a headwind.”
Strength in Occasion Categories
According to data from NPD, fashion shoes have been the fastest growing segment in the footwear market this year in terms of sales, returning to pre-pandemic levels in 2019.
“Social events are back on the calendar, prompting consumers to purchase dressier silhouettes to refresh and replenish their wardrobes — something they really haven’t had to do for two years,” said Beth Goldstein, fashion footwear and accessories analyst at NPD.
In Q3, fashion shoe sales were up 7% to $3.5 billion, as consumers spent more on sandals and occasion-based footwear, NPD found.
“The big shift in category spending away from casual/home goods to occasion categories (dress apparel/beauty) that occurred in 1Q22 has continued through the course of the year and likely has staying power well into 2023, in our view,” said Gordon Haskett Reseach Advisors (GHRA) in an Oct. 12 note discussing a recent investor presentation from Macy’s.
