Retail Forecast: 2019 looks good, but economists see bumps further down the road
Retailers will enjoy brisk economic tail winds in 2019. A strong labor market should continue to inspire liberal spending, while a robust business climate fuels higher corporate profits. At the same time, economists are starting to see early signs of an inevitable correction.
“The coming 12 months should be a good year for retailers,” said Scott Hoyt, Senior Director of Consumer Economics for Moody’s Analytics (economy.com). “Core retail sales (which exclude the volatile auto and gasoline segments) are expected to grow a healthy 4.7 percent in 2019.”
Happy shoppers are driving the favorable retailing environment.
“Consumers seem to be euphoric right now,” added Hoyt. “The fiscal stimulus in the form of tax cuts, as well as the tight job market, mean there are very few negatives when it comes to consumer fundamentals.”
That tight labor market should constrict still further in the months ahead. Moody’s expects unemployment to drop to 3.4% by the end of 2019, down from the 3.7% recorded at the end of 2018. And it seems the tightening labor market is finally affecting wages, so shoppers have more cash to spend. Average hourly earnings are expected to grow by 3.2% in 2019, up from the 2.8% of 2018 and the 2.6% of the previous year.
Wealthier consumers will support higher price tags in the months ahead, according to Hoyt. The need to increase revenues largely by boosting prices rather than moving more merchandise accelerates a retail trend that began in 2018.
The robust consumer sentiment reflects the energies of a larger economy that is still growing.
“The business cycle has entered its boom phase,” said Sophia Koropeckyj, managing firector of industry economics at Moody’s Analytics. The gross national product (GNP), the most commonly accepted measure of economic growth, is expected to grow at a 2.7% clip in 2019.
Deceleration: Despite the generally sunny outlook, the GNP forecast represents a modest deceleration from the 3.0% growth anticipated when numbers are finally tallied for 2018. And the 2019 retail sales growth estimate is also a deceleration from the 5.0% surge of the previous year.
“There are several reasons for slower growth in 2019,” said Hoyt. “The largest is that deficit-financed tax cuts at the start of 2018 lifted growth. No such support, in terms of an additional increase in after-tax income, is expected in 2019. Job growth will also be slower because of there being fewer available workers.”
Finally, Hoyt added, interest rates will likely be higher, a factor that can have a softening effect.
And to look a bit further down the track, there are signs that the fast-moving economic carriage may be nearing the top of the roller coaster.
“The nation is experiencing robust economic growth, tightening labor and product markets, intensifying wage and price pressures, monetary tightening, and higher interest rates,” explained Koropeckyj. “These characterize a business cycle nearing its end, just prior to a recession.”
Mention of the R-word will ring a bell for the many people who fear the decade-long bull market is getting a bit long in the tooth. Just when is that recession expected to hit?
“We prefer not to forecast recessions, which are often caused by shocks that cannot be predicted,” said Koropeckyj. “However, our forecast for 2020 includes a set of conditions that are consistent with a recession. While we do not expect the textbook definition–two quarters of GDP decline — to occur, real GDP growth is expected to slow to a crawl.”
Other relevant predictions include a too-rapid increase in unemployment, the cessation of job growth, flat industrial production, and a deceleration of personal income growth.
To help draw a bead on the recession’s timing — or maybe just to bring into sharper focus the changing operating environment — Hoyt suggested watching a number of important indicators in the early months of 2019.
“I would keep a close eye on the political environment,” he said “What is going on with tariffs, and is there a risk of a trade war?”
The labor market also looms large, added Hoyt. “How much are wages accelerating, and is the increase fast enough to offset any deceleration of employment growth?”
Beyond that, monitor the interest rate hikes from the Federal Reserve.
“At some point those will start to bite and put a damper on growth,” said Hoyt. “That will probably be an issue for later in 2019, but the faster rates go up the sooner the economy might be affected.”
Analysis: Scaled-down Sears could live on
Sears declared bankruptcy this week, bringing the company to a new low after several years of steady decline. In order to avoid going out of business altogether, Sears will close at least 142 Sears and Kmart department stores by the end of 2018, which – along with 46 closures already planned for November – will bring the company’s total number of stores in operation to fewer than 500.
Many of the remaining locations have so far been profitable, so a scaled-down Sears could conceivably go on indefinitely. However, the company is currently seeking a buyer for these stores in order to preserve their long-term viability and the thousands of jobs they provide across the US. The bankruptcy could threaten these stores’ profit margins if vendors and creditors avoid the struggling retailer as a financial risk, so it’s not yet out of the question that Sears goes the way of Toys R” Us and RadioShack.
In any case, bankruptcy and downsizing at this scale represent a monumental change for the former leader of the U.S. retail market. Sears was the equivalent of Amazon and Walmart for much of the twentieth century – when mail-order catalogs and large department stores grew to meet the expanding purchasing power of the American consumer – and is still a staple in shopping malls.
Since 1989, when Walmart surpassed Sears in domestic revenues, Sears has faced intense competition on multiple fronts:
• Supercenters (e.g., Walmart, Target), which offer even larger selections of low-cost goods and conveniently combine the department store with the supermarket;
• Home centers (e.g., Home Depot, Lowe’s, Menards), which are one-stop shops for tools, building materials, appliances, furniture, and other home goods and hardware; and
• E-commerce, which is dominated by Amazon and the leading brick-and-mortar retailers.
As a sign of the trouble Sears has been in for the last several years, the company finally sold its Craftsman brand to Stanley Black & Decker in March 2017, and the idea of selling Kenmore came up again in August 2018. Both brands have historically enjoyed widespread recognition and approval among U.S. consumers, but have lately languished under the retail chain’s poor management.
The Craftsman deal promises to revitalize that brand, especially as it brings the brand into growing retail channels such as Lowe’s and Ace Hardware. In September, Stanley Black & Decker rolled out 1,200 new Craftsman products, including hand tools, power tools, tool storage, lawn and garden equipment, and more. The deal gives Sears a perpetual license to continue selling Craftsman, so shoppers will still find these products where they have always been, but the brand is now under Stanley Black & Decker’s management, which will help to maintain the brand’s strong name.
According to Freedonia analyst Cara Brosius, Stanley Black & Decker has been more understanding of consumer trends than Sears, including in its distribution through home centers.
“Many customers like home centers for being a one-stop shop for home improvement projects, since they can consult store employees for advice and purchase virtually anything they need – either in-store or online for in-store pickup if the products they need are not in stock, she said.
This makes two significant acquisitions for Stanley Black & Decker in the last couple of years. In September, the company also purchased a 20% stake in MTD Products – the current market leader in U.S. power lawn and garden equipment – with the option to acquire the remaining 80% beginning in July 2021. Between its ownership of Craftsman and its stake in MTD Products, Stanley Black & Decker is quickly becoming a power player in both the tools market and the lawn and garden equipment market.
For more information on the manufacture and distribution of tools, power equipment, and related products, see the following Freedonia Group studies:
• Hand Tools
• Power Tools
• Tool Storage Products
• Power Lawn & Garden Equipment
Famous Footwear parent in $360 million brand acquisition
Footwear giant Caleres is expanding its portfolio with a brand that counts Oprah Winfrey among its biggest fans.
The parent company of Famous Footwear, and such brands as Sam Edelman, Naturalizer, LifeStride and Dr. Scholls and others, has acquired Vionic Group for $360 million. The comfort footwear label, which has posted a compound annual growth rate of 20% for the past six years, has appeared on Winrey’s popular “Oprah’s Favorite Things” list for two consecutive years. Approximately 25% of its revenue during the past year came from online.
“The acquisition of Vionic is another fantastic opportunity to add a growing brand – with strong consumer loyalty and a solid cultural fit – to our brand portfolio,” said Diane Sullivan, CEO, president and chairman of Caleres. “The brand has already proven to be a disruptive addition to the industry, as the dynamic Vionic team has blended proprietary technology with comfort and style. We’re looking forward to supporting the brand in their continued success and to sharing our extensive infrastructure, including our expertise in product design, brand development and global sourcing.”
Caleres operates more than 1,200 stores, and also distributes to major department and specialty stores, its branded e-commerce sites, and on many additional third-party retail websites. In December 2017, it acquired Allen Edmonds, the nearly 100-year-old men’s footwear and accessories brand. In July, it acquired a majority stake in Blowfish Malibu, an on-trend, Southern California-inspired footwear collection.