Retailing Faces Hazardous Times – Outlook For 2023

We are sailing into unchartered waters. The Federal Reserve will continue to raise interest rates in order to stem inflationary pressures. The outlook is even more uncertain after a winter storm killed hopes for a strong season ending that would have cleared much of the remaining winter clothes. The storm was nationwide, and no price reductions were enough to help stores attract the needed customers. There just was meager customer traffic.

Here are some details complicating the retail picture:

Merchandise was being marked down as the final days before Christmas saw customer traffic dwindle. These markdowns were taken, but customers did not leave their warm homes to see the bargains. In fact, the storm left overages for the post-holiday sales events. I feel that additional markdowns will be taken, and they will be above plan. This will affect the bottom line adversely.

No conclusions should be taken from the sales that will be reported in the next few weeks. We have to wait until the companies report their final fiscal quarter results to fully assess performance. Merchandise must then be “at market” pricing which means that winter clothes may receive a hefty price whack. With the bottom line disappointing because of poor low profit margins, it will discourage investors.

Supply lines have improved. Shipping is no longer a problem at any major harbor and trucking has also improved; merchandise now gets to chains’ warehouses and distribution centers without major delays. The actions taken to avert the railroad strike threat by the Biden administration also kept merchandise flowing smoothly and was a clear signal that the government will not tolerate a strike threat.

Inflation has taken its toll. Groceries, meats, and poultry are all at intolerably high price levels and that needs to be lowered. Reluctantly, I support the Federal Reserve’s action of raising rates further since it will reduce further buying.

Management is in flux. There have been quite a few management changes, and I would not be surprised if quite a few more are being considered and may be announced. Replacements from outside the retail industry can bring new ideas but may harm a company’s momentum during the transition.

THE OUTLOOK: I think that 2023 will a rough year. Retailers should be wary and not repeat last year’s optimistic behavior. Early in-the-year optimism spread through the industry and merchandise was bought in ample quantities by stores like WalmartWMT
and TargetTGT
. This year many chains will hold back. Maybe they will miss some sales – but they will stay on the safe side. It is likely to be correct since we will have to go through two to three slow-sales quarters in order to see consumer spending realign and have a more normal environment. My view is that we will see a better environment by the end of 2023. The fourth quarter is likely to be again very promotional but more profitable since promotions will be planned.

POSTSCRIPT: There will be some weak performing companies that will bid good-bye to their CEOs while others will close their doors. Closings will cause more unemployment as associates suddenly lose their jobs. Either way, there will be disruptions as some companies deal with weak managements and others feel pressures due to investor impatience. The stock market is itching for change, but changes have to be deliberate. Change will trigger a better outlook for these companies.