Gloomy U.S. retail outlook dulls hopes of strong holiday season spending

By Ananya Mariam Rajesh and Aishwarya Venugopal

(Reuters) -Latest results and forecasts from retailers ranging from Macy’s (NYSE:) to Foot Locker (NYSE:) are fresh signs that U.S. consumer spending is under stress heading into the second half of the year.

Middle-income Americans are spending less as many struggle to pay off existing card debts amid a surge in cost of living, raising worries for retail sector investors betting on more business during the back-to-school and holiday seasons.

“It is going to be a challenging back half,” said Telsey Advisory Group analyst Cristina Fernandez, adding that consumers are looking for value and spending on buying the things they need.

A bellwether for back-to-school demand, Foot Locker joined rival Dick’s Sporting Goods (NYSE:) on Wednesday to cut annual profit forecast, sending the shares of sportswear retailers tumbling.

“We did see a softening in trends in July and are adjusting our 2023 outlook to allow us to best compete for price-sensitive consumers,” Foot Locker CEO Mary Dillon said.

Both the companies along with Target have warned that profits have been under pressure from loss of inventory due to instances of theft at their stores.

Kohl’s (NYSE:) and Macy’s also kept their annual targets unchanged despite beating profit expectations for second quarter, with the latter warning of weak demand and a faster-than-expected rise in credit card payment delays.

“The macro environment is having the lion’s share of the impact on credit and is a real indicator of where we think the health of the consumer is … supporting our cautious approach,” Macy’s CFO Adrian Mitchell said on Tuesday.

Foot Locker and Macy’s could see a bigger hit to their sales as they cater to lower-to-middle income consumers, said Thomas Hayes, chairman of hedge fund Great Hill Capital, while the winners would include Walmart (NYSE:) and the dollar stores that benefit from consumers trading down.

Walmart last week raised its full-year forecasts and beat second-quarter results, benefiting from strong demand for its low-priced groceries.

“The consumer is still alive and well, but clearly more price conscious this year than last,” said Art Hogan, chief market strategist at B Riley Wealth.

Some clothing retailers also said demand was holding up.

Abercrombie & Fitch raised its annual sales forecast on Wednesday, betting that shoppers would buy more of its refreshed collection of styles that include dressy apparel and cargo pants.

The company’s shares closed up nearly 24%.

Guess (NYSE:) lifted its annual profit forecast, benefiting from an increase in prices and fewer discounts, as well as strong sales in Asia and Europe.

The company’s stock was up 16% in after-hours trading.