According to this week’s headlines, the United States might be on the precipice of financial disaster.
President Joe Biden and Republican congressional leaders are locked in negotiations that would trade spending cuts for an agreement to raise the limit on how much the US government can borrow. Both sides say they’re close to a deal. But Treasury Secretary Janet Yellen has warned that the government will default on some debt payments if a resolution isn’t reached by June 1. While there’s a chance that the deadline could be pushed out by days or even weeks, all agree a federal default would have grave consequences not just for the US, but the entire global economy.
Meanwhile, a healthy portion of US consumers seem to be spending like there’s no tomorrow.
Also this week, a slew of major retailers reported surging first-quarter sales. Many took the opportunity to raise their outlook for the remainder of 2023. VF Corp., the owner of brands like Supreme, Vans and The North Face, also beat expectations, sending its stock up. So did Ralph Lauren, Urban Outfitters and E.l.f. Beauty. Even Kohl’s, a struggling department store chain, reported a surprise profit.
These gravity-defying earnings reflect an economy that has slowed from its immediate post-pandemic boom under the weight of high inflation and rising interest rates, but remains resilient. Unemployment is still low, and consumers with jobs and some savings are eager to spend, especially on brands like Abercrombie and E.l.f. that are stocking the right merchandise. People aren’t shopping indiscriminately: slumping retailers Express and Gap both reported declining sales this week (though the latter did post a surprise profit).
“Brands and new product seem to be resonating, coming off a year with a dearth in newness, and despite what we believe is a relatively stretched consumer,” wrote Dylan Carden, an analyst with William Blair, in a research note on Abercrombie’s results.
Strong results at mass retailers may be coming at the expense of luxury brands. Labels like Louis Vuitton, Armani and Chanel, which saw stunning growth in the US over the last couple years, now say they’re seeing a slowdown. On Thursday, Armani saw sales in the US increase by 10 percent in the first quarter, compared to 22 percent in Europe and 14 percent in Asia. Chanel began to see demand soften in November, chief financial officer Philippe Blondiaux told BoF. Last month, LVMH reported that its American demand had simmered down, with a first quarter sales increase of just 8 percent.
The discrepancy is partly down to tough comparisons: it’s hard for any brand to grow sales by 20 percent year after year, while mall chains were much slower to recover from the 2020 lockdowns. But the signs of economic strain are also probably playing a role. When times are tough, shoppers often switch from big splurges to little indulgences — E.l.f. instead of Estée Lauder, or Abercrombie instead of Armani. LVMH finance chief Jean-Jacques Guiony, noted that the conglomerate’s first-quarter US sales increase was primarily driven by strong performance at Sephora as younger shoppers’ spending on luxury goods waned.
What comes next? The US may still be headed for recession, even if it’s taking longer to arrive than expected. Cowen, an investment bank, said retail foot traffic is growing at its slowest pace since February 2021.
The rest of the world isn’t much better off; the UK economy is seeing sluggish growth, and Germany entered a recession this week. China is a major exception, as many brands are hoping post-lockdown shopping there will make up for any shortfalls in the West.
Of course, if negotiations break down in Washington, all bets are off. The US has never defaulted on its debt. We’ll be in unknown territory if the government is unable to pay its bills next month.
And even the brands that are seeing positive results now are bracing for a possible reversal of fortune.
“We’ve become incrementally more cautious in the near term,” Ralph Lauren CEO Patrice Louvet told Bloomberg on Thursday. “It will likely get choppier.”
THE NEWS IN BRIEF
FASHION, BUSINESS AND THE ECONOMY
Luxury stocks lose $30 billion in one day on demand fears. A blistering rally in luxury goods stocks this year powered by international demand, particularly from China, has taken a hit, wiping out more than $30 billion from the sector on Tuesday.
VF Corp. beats quarterly profit estimates on North Face demand. The company has been lifting prices of its apparel and footwear to protect its profit margins from higher supply and distribution costs. However, air freight and ocean rates declined during the quarter in a boost to its bottom line.
Armani sales up as Asia rebounds. Italy’s Armani Group said on Thursday its sales jumped 18 percent in the first quarter thanks to a rebound in Asia and more modest growth in the United States, where a slowdown is expected in the coming months.
Ralph Lauren results top estimates. Ralph Lauren Corp. beat profit estimates and reported a surprise rise in fourth-quarter revenue on Thursday as its new seasonal collections resonated with affluent shoppers at a time when luxury spending has cooled in the United States.
Express, Inc. completes acquisition of Bonobos, posts 15 percent sales dip. Express, Inc. completed its joint acquisition of the menswear brand Bonobos in partnership with WHP Global for a combined purchase price of $75 million, the company announced Wednesday.
Abercrombie & Fitch raises 2023 sales forecast. Abercrombie & Fitch Inc on Wednesday reported a surprise quarterly profit and raised its annual sales forecast, as the apparel retailer bets on its efforts to stock shelves with in-demand products, sending its shares up 18 percent.
Inditex CEO optimistic about 2023. Zara owner Inditex has started the year at “full throttle”, its chief executive Oscar Garcia Maceiras told Expansion newspaper in an interview released on Tuesday, adding that he is optimistic about the year.
Kohl’s rises on profit beat as CEO’s fixes start to pay off. Kohl’s Corp. shares soared after it reported a surprise profit and reduced its stockpile of merchandise in the first quarter — early signs that the new chief executive officer is bolstering performance.
Chanel and Brunello Cucinelli to take a stake in Italian yarn manufacturer. Chanel and Brunello Cucinelli on Tuesday signed a joint agreement to take 24.5 percent stakes in Italian cashmere and wool manufacturer Cariaggi Lanificio. The Cariaggi family will remain in control of 51 percent of shares.
H&M and Kering are among companies piloting science-based targets for nature. The move to address businesses’ impact on nature is part of a new frontier of corporate environmental reporting.
EU countries back ban on the destruction of unsold textiles. The governments and the European Parliament need to agree on the Ecodesign Regulation before it can enter law. Under the initial March 2022 proposal by the European Commission, the Commission itself was supposed to determine whether to put destruction bans in place.
Report: Japan’s Uniqlo to exit Russia. Japanese brand Uniqlo has decided to leave Russia permanently, opening the path for a sale of the business, said Russia’s deputy trade minister according to the daily Izvestia. Uniqlo owner Fast Retailing suspended the clothing brand’s operations in Russia in March 2022 after Moscow launched its attack on Ukraine.
Shein expands fast-fashion empire in Brazil and Mexico. Fast-fashion giant Shein is rapidly ramping up manufacturing in Brazil, with 100 factories already producing for the online retailer since it announced plans to invest $148 million in the region a month ago. The company is also exploring plans to build a factory in Mexico as one of its manufacturing hubs outside China, sources familiar with the matter told Reuters.
THE BUSINESS OF BEAUTY
E.l.f. reports a 48 percent increase in net sales for the fiscal year 2023. The company raised its 2024 forecast and expects sales between $705 million and $720 million.
PEOPLE
Audemars Piguet names Ilaria Resta as new CEO. The world’s second-biggest independent watch brand has named a veteran perfume and consumer goods executive to lead its next chapter.
MEDIA AND TECHNOLOGY
TikTok sues Montana after state move to ban app. TikTok Inc on Monday filed a lawsuit challenging the state of Montana’s new ban on the use of the Chinese-owned short-video app.
Together Group acquires production company North Six. The production company, which was caught up in Balenciaga’s recent controversy, has won acclaim for its work on luxury campaigns over the last two decades. Now, it joins a growing portfolio of PR and creative agencies that includes Purple and King & Partners.
Compiled by Sarah Elson.
