Mid-Year Financial Review: Retailers Take on a New Attitude as Economy Slows

As consumers continue to adjust their buying habits and purchase less on apparel, retailers are tweaking their business models to keep shoppers coming through the doors.

Instead of serving up a steady stream of clothing, shoes and accessories, some retail chains are thinking outside the box.

One of those is JCPenney. Recently, Marvin Ellison, the mid-tier chain’s chief executive since November 2014, told a group of investors that the struggling retailer has had its ear to the ground when it comes to listening to shoppers’ needs, particularly after the chain’s same-store sales during the first quarter of 2016 were off 0.4 percent.

“What we have determined pretty consistently is that the consumer is in real positive shape from a financial standpoint,” he told a crowd at a June 15 Piper Jaffray Consumer Conference. “The consumer tells us that their wages are up, their job stability is better than it’s been in many years, they have price appreciation in their home, and they have more money in their savings account than they had in quite a while.”

Overall, consumers feel good about their economic situation, but they are pulling back a bit on apparel and spending more on entertainment and experiences. They also feel some uncertainty about the overall economic situation because it is becoming so unpredictable.

“We don’t have a perfect line of sight on what’s driving that, but there’s a lot of data and a lot of research that shows that when there’s a presidential election without an incumbent, it tends to lower consumer confidence. That may be playing a role,” the retail executive said.

With shoppers doling out less for clothing, JCPenney is planning to expand its home-beautification departments because that is where shoppers said they were spending more money.

The Texas-based retailer is also planning to beef up its window-treatment area, and it is doing some pilot programs with Ashley’s Furniture as well as Empire Flooring. “Our customer said to us they would love to buy flooring as well as window treatments,” Ellison said.

One advantage to this strategy is that online companies that only sell apparel have a hard time competing with this kind of retail formula.

JCPenney’s new plan is part of the changing retail scene, where stores have to be smarter and move faster as competition grows and the economy starts to taper off.

The U.S. economy is already expected to grow slower this year than last year, but a mini shock wave rippled through the world economy on June 23 when the United Kingdom voted to leave the European Union in a process nicknamed Brexit.

The Brexit vote added one more layer of concern to the U.S. and the global economy’s future. While Britain seems to be the country that would suffer the most, other sectors around the world are closely monitoring the situation. But the U.S. might not fare so badly. “These things have a greater effect on the financial markets than the real economy,” noted Robert Kleinhenz, executive director of research at Los Angeles–based Beacon Economics. “We are mainly an internally driven economy.”

The internally driven economy, however, isn’t driving as fast. The U.S. gross domestic product is predicted to expand by 2 percent to 2.1 percent this year and next year compared to 2.4 percent last year. “That is really pretty low,” said economist Raymond Sfeir, director of the A. Gary Anderson Center for Economic Research at Chapman University.

The center recently released an updated 2016 economic forecast that showed that a number of factors are dampening U.S. consumer spending. First, housing appreciation is beginning to stabilize and the stock market has been on an up-and-down swing.

Also, job growth is showing signs of weakening. “The second half of the year will not be as good as the first half,” Sfeir said.

Still, preliminary data by payroll company Automatic Data Processing shows that 172,000 new jobs were added in June, up from 168,000 in May.

In California, job growth will increase by 2.5 percent this year compared to 3 percent last year. That means there should be about 400,000 new jobs added in 2016.

One sector that has been shedding jobs in California is manufacturing. Since 2007, Los Angeles County has lost 20 percent of its manufacturing jobs and California has seen a 1 percent drop.

Apparel manufacturing jobs continue to be whittled away by clothing companies shifting more production to factories outside the state and country as the rising minimum wage and various California regulations make it more financially difficult to make apparel here.

The strength of the U.S. dollar also makes it cheaper to manufacture overseas. “Foreign competition gets an advantage every time the value of the dollar strengthens,” Kleinhenz said.

The strong dollar makes U.S. goods more expensive to overseas buyers. The U.S. dollar’s value was leveling off until the Brexit referendum took place. The British pound now equals $1.29, which is a 31-year low. One year ago, the British pound was valued at $1.55.

The uncertainty surrounding Britain and the slowing U.S. economy has many economists predicting that the Federal Reserve will not raise interest rates this year.

Lindsey Piegza, chief economist for fixed income at stock broker Stifel Nicolaus & Co., said the recent global financial market events have no doubt exacerbated the Fed’s concerns about raising interest rates in the foreseeable future.

Low interest rates mean credit-card debt is slightly cheaper and also may prompt consumers to spend more dollars since their savings accounts aren’t earning much money.

Britt Beemer, a retail analyst and founder of America’s Research Group, which polls 1,200 consumers a week to take the pulse of their retail-spending attitude, said he expects retail sales to be better in the second half of the year but it will be very sketchy. Only those retailers offering discounts—such as Ross Dress for Less, Marshalls and T.J. Maxx—will be seeing brisk business. “The Ross Dress for Lesses and the Marshalls of the world keep doing better and better,” he noted.

While apparel sales in dollars have been up 3.5 percent to 4 percent in the first half of this year, unit sales are holding steady, Beemer observed. “In the last year to year and a half, we have never had a month where consumers are buying as many items this year as last year,” he said. “It’s a gobbledegook of a mess out there.”

He said that Memorial Day traffic was up 52 percent, but dollar sales rose only 17 percent to 18 percent. Much of retailers’ success during the Memorial Day holiday cut into sales during March, April and May as consumers waited for those big discounts.