With 2023 almost in the rear view, analysts and retail experts are making their predictions for what to expect for the retail industry in 2024.
2023 was a year characterized by inflation, inventory excesses and a bloated wholesale market, making it a particularly challenging one for footwear and apparel retailers. Looking ahead, the start of 2024 will likely display some carryover effects from the prior year, though a return to normalcy could be on the horizon.
According to a 2024 investment strategy report from BMO Capital Markets chief investment strategist Brian Belski, the performance of the U.S. stock market in 2023 laid the foundation for “a path of normalcy for earnings growth, valuation trends and price performance that is likely to unfold over the next three to five years.”
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Belski said he believes U.S. stocks will see “positive returns in 2024, albeit while demonstrating more sanguine, broadly distributed and fundamentally defined performance relative to the last decade or so. In other words, normal and typical.”
As for the state of the U.S. consumer, it’s difficult to predict what that might look like in 2024. Consumer spending — especially in discretionary categories like footwear — was challenged throughout 2023 and experienced a sizable drop-off in the fall. More recently, however, some retailers have reported a strong start to the holiday season, which could signal early positive signs for 2024.
“We don’t really know exactly what direction that consumer is gonna go in next year,” BTIG analyst Janine Stichter told FN in an interview earlier this month. “It’s about being able to play offense as the consumer gets better and being able to play defense if they continue to retreat.”
The value equation
Despite the unpredictability factor, some analysts believe that consumers will continue to gravitate toward retailers and brands that offer value in 2024.
“The uncertain macro backdrop continues to expand the appeal of value across a wider set of consumers,” read a special report from William Blair Equity Research in December. “Many value-centric retailers benefit from a stickier core customer, as well as the ‘trade-down’ effect across middle- and higher-income customers.”
As such, discount retailers like Five Below and TJX Companies, which owns TJ Maxx and Marshalls, are emerging as top stock picks among some analysts.
In a Dec. 7 note, Jefferies analyst Corey Tarlowe made a strong case for stocks in the off-price sector, which have benefited from cost-conscious consumers. “TJX should benefit from the secular migration toward the off-price sector, likely leading to share gains from other, more traditional retailers, in our view,” he wrote.
Retailers across the board are also entering 2024 with cleaner inventory positions, which makes them less reliant on promotions and markdowns to clear through product.
“The industry is entering the holiday season with a much cleaner inventory position (down 5 percent year-over-year on a per-store basis) and is generally taking a much more conservative approach, which should help prevent overly irrational promotional behavior,” read the special report from William Blair Equity Research. “But we expect elevated demand for value to continue to weigh on prices in discretionary categories.”
Special events
Beyond typical industry trends, there are several large events scheduled in 2024 that could impact the state of the U.S. economy and retail industry.
For starters, the 2024 Summer Olympics will have an impact on how brands — particularly those in the athletic space — leverage their marketing spend in 2024.
“Going into an Olympic year, I think there’ll be a lot of focus on product innovation and newness and probably bigger marketing budgets heading into the Olympics, for the athletic side,” BTIG’s Stichter said.
At the same time, allocating for this event could mean cutbacks in other areas as companies leverage their budgets.
The 2024 U.S. presidential election could also impact the industry. According to a late December note from Morgan Stanley analysts led by Alex Straton, “election uncertainty often pressures consumer discretionary spending and comes with lower-than-average mall traffic.”
However, while election years tend to be correlated with slower gains for U.S. stocks, re-election years (as in this year, for Biden), are correlated with a stronger performance from the S&P 500, BMO’s Belski noted, adding that the potential market impact of the election is in a position to be positive.
The results of the U.S. election could also have implications for the future of trade relations with China, an area that directly impacts the footwear industry.
“Mature and reasonable trade with China is just a part of the dynamic for footwear consumers and for companies alike,” Matt Priest, president and CEO of the Footwear Distributors and Retailers of America (FDRA), told FN in an interview. “We continue to provide our feedback and guidance to policymakers on the importance of trade with China.”
As for China itself, a crucial sales region for several footwear brands, it remains to be seen if 2024 could be the year the environment finally normalizes there.
According to the Morgan Stanley note, the desired 2023 recovery in China was “not as robust as the market expected.” This uncertainty and weakness will likely persist through the first quarter of 2024, but “demand/pricing stabilization and more disciplined supply could be positive catalysts for 2Q24 onwards.”
