Retail winners break away from the pack

As the holiday season heats up, retailers have a new opportunity to attract even the most selective shoppers and convince them to splurge on discretionary items like party outfits, makeup or toys.

But free spending season doesn’t increase sales for everyone.

Retailer profit reports over the past two weeks have illustrated a stark divide between brands that are gaining sales and those that are missing out.

Target, Kohl’s And Best buy each reported disappointing third-quarter results as early holiday deals failed to significantly boost their businesses. On the other hand, Walmart, Dick’s Sporting Goods And Abercrombie & Fitch have seen strong sales in their recent quarters.

These reports follow a more than two-year period of inflation in the United States that has pushed shoppers to become selective in their spending while balancing higher prices for groceries, housing, dining out and much more. These patterns persisted, even though inflation has cooledforcing retailers to step up their efforts to entice customers to open their wallets.

Discerning consumers have widened the gap between successful and struggling retailers even further as the holiday shopping season approaches, said Neil Saunders, managing director of GlobalData Retail.

“People are still spending, but they may not have as much to spend,” he said. “So rather than buying five things, they might buy three. And in that environment, it’s easy to say, ‘Well, where am I not going to buy things?’ Who am I going to eliminate?’ And they will eliminate the weakest retailers.”

Holiday spending in November and December is expected to increase 2.5% to 3.5% from 2023 and range between $979.5 billion and $989 billion, according to the National Retail Federation, a retail trade group. That’s a smaller year-over-year increase than the 3.9% increase seen between the 2022 and 2023 holiday seasons, when spending totaled $955.6 billion. The NRF figure excludes car dealerships, gas stations and restaurants.

Still, retailers’ forecasts for the holiday quarter vary widely. Abercrombie and Dick are both raised their outlook for the full year this week and said they expect a strong holiday shopping season.

“We’ve seen a strong response to our holiday assortments, and we’re ready and excited for the peak sales period to kick into high gear this week,” said Scott Lipesky, director of sales. Abercrombie operations during the company’s earnings conference call.

Nordstrom And Walmart struck a more cautious note.

During Nordstrom’s earnings call, CEO Erik Nordstrom said the department store’s owner noticed slower purchasing trends at the end of October and took this into account in its forecasts. The company offered a slight adjustment to its forecast, raising the low end of its sales forecast, even though third-quarter sales exceeded Wall Street expectations.

Walmart Chief Financial Officer John David Rainey told CNBC that the holidays are “getting off to a pretty good start” but consumers remain cautious with their spending and wait for better prices.

The big box retailer raised its sales forecast and its results, however, reflect a promising change in trend. For the second quarter in a row, Walmart’s sales of general merchandise – items outside of the grocery or household essentials aisles – increased year over year. Prior to that, general merchandise sales had declined for 11 consecutive quarters.

Rainey said the move likely reflects both easing inflationary pressures on families as food prices fall, as well as the company’s own ability to sell more discretionary items as it adds more to its website through a third-party marketplace.

Target and Kohl’s had pessimistic forecasts. Kohl’s warned that there would be a drop in sales greater than expected And announced a change of CEO before the crucial shopping season.

Target said it expects comparable sales for the holiday quarter to be roughly flat. This metric includes sales on Target’s website and at stores open at least 13 months.

Even with its poor forecast, Target emphasized how it was trying to attract shoppers’ attention and dollars. During an earnings conference call last week, Chief Commercial Officer Rick Gomez said Target will offer more than 150 items inspired by Universal’s film “Wicked,” including clothing, food, beauty items and toys. He will also release an exclusive vinyl and book for Taylor Swift fans on Black Friday.

And Target will rely on a proven retail tactic to try to drive traffic: It will slash prices on 2,000 more items for the holiday season, after slashing them on 5,000 items earlier this year.

GlobalData’s Saunders said Target, Kohl’s and department stores like Macy’s are in a tougher situation this holiday season because they sell more wants than needs.

Customers are “more experiential” this year and want to purchase gift items that have practical value.

“Silly little games, novelty socks and such — those are areas where people really cut back a little bit because they’re just unnecessary purchases, and people don’t want to waste money, even if it’s just for a gift,” he said. “They want the gifts to be useful and relevant.”

Some businesses may have purchased too much inventory heading into the shopping season – or the wrong mix of items. At Kohl’s, for example, Saunders said he’s seen a lot of clothing and small appliances like coffee makers and airfryers on display as the retailer prepares for Black Friday. If buyers don’t show up in large numbers, these items could end up on the clearance rack.

“I look at it and wonder, ‘Is this going to sell?’” he said. “Because you’re not already attracting a lot of traffic to stores. So why is that going to change with Black Friday?”

Marshal Cohen, chief retail advisor for market research firm Circana, said the winning formula this holiday season will be value, not only with lower prices, but also the perception of “best value for money” with novelty or quality items.

And, he added, retailers are already pointing to external factors to blame in case their holiday season is disappointing.

“Every year, retailers always position themselves to have a good reason why they are not achieving their numbers,” Cohen said. “So when they talk about the weather, or a dock strike, or supply chain issues, it has more to do with them hedging their bets that they might have challenges future.”

“I always say, ‘OK, here’s the excuse this year. What is it going to be?'”

Disclosure: Comcast is the parent company of CNBC and NBCUniversal. NBCUniversal distributed “Wicked.”

— CNBC’s Gabrielle Fonrouge contributed to this report.