As retailers enter the holiday shopping season, the winners are pulling away from the pack

• Retailers’ earnings reports over the past two weeks have illustrated a sharp divide between brands that are winning sales and those that are missing out.
• Target, Kohl’s and Best Buy each reported disappointing results in their most recent quarters, but Walmart, Dick’s Sporting Goods and Abercrombie & Fitch posted strong sales.
• As shoppers have less money to go around, they are cutting out weaker retailers, said Neil Saunders, managing director of GlobalData Retail.

As the holiday season heats up, retailers are getting a fresh opportunity to attract even the most selective shoppers and persuade them to splurge on discretionary items such as party outfits, makeup or toys.

But the free-spending season isn’t lifting sales for everyone.

Retailers’ earnings reports over the past two weeks have illustrated a sharp divide between brands that are winning sales and those that are missing out.

Target, Kohl’s and Best Buy each reported disappointing third-quarter results as early holiday deals fell short of meaningfully boosting their businesses. On the other hand, Walmart, Dick’s Sporting Goods and Abercrombie & Fitch posted strong sales in their most recent quarters.

The reports come after a more-than-two-year stretch of inflation in the U.S. that caused shoppers to become selective about spending while balancing higher prices on groceries, housing, restaurant meals and more. Those patterns have persisted, even as inflation has cooled, forcing retailers to work harder to get customers to open up their wallets.

Choosy consumers have made the gulf between successful and struggling retailers even more stark heading into the holiday shopping season, said Neil Saunders, managing director of GlobalData Retail.

“People are still spending, but they perhaps don’t have as much to spend,” he said. “So rather than buying five things, they might be buying three things. And under that environment, it’s easy to say, ‘Well, where do I not go to buy things? Who am I going to cut out?’ And they’ll cut out the weak retailers.”

Setting expectations

Holiday spending in November and December is expected to increase by 2.5% to 3.5% compared with 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% jump from the 2022 to 2023 holiday season, when spending totaled $955.6 billion. The NRF’s figure excludes automobile dealers, gasoline stations and restaurants.

Yet retailers’ forecasts for the holiday quarter have varied widely. Dick’s and Abercrombie both hiked their full-year outlooks this week and said they expect a strong holiday shopping season.

“We’ve seen a strong early response to our holiday assortments, and we are ready and excited for the peak selling period to kick into high gear this week,” Abercrombie’s Chief Operating Officer Scott Lipesky said on the company’s earnings call Tuesday.

Nordstrom and Walmart struck a more cautious note.

On Nordstrom’s earnings call Tuesday, CEO Erik Nordstrom said the department store owner noticed slower shopping trends at the end of October and factored those into its forecast. The company offered a muted guidance adjustment, raising the low end of its sales forecast, despite beating Wall Street’s third-quarter sales expectations.

Walmart Chief Financial Officer John David Rainey told CNBC that the holidays are “off to a pretty good start” but that consumers are still being careful with spending and are waiting for better prices.

The big-box retailer raised its sales forecast and its results reflected a promising change in trends, however. For the second quarter in a row, Walmart’s sales of general merchandise — items outside the grocery department or household essentials aisles — rose year over year. Before that, sales of general merchandise had declined for 11 straight quarters.

Rainey said that swing likely reflects both easing inflationary pressures on families as food prices come down as well as the company’s own ability to sell more discretionary items as it’s added more to its website through its third-party marketplace.

Target and Kohl’s had downbeat forecasts. Kohl’s warned it will have a deeper-than-expected drop in sales and announced a change in CEO ahead of the crucial shopping season.

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

Even with its lackluster forecast, Target emphasized ways it’s trying to grab shoppers’ attention and dollars. On an earnings call Nov. 20, Chief Commercial Officer Rick Gomez said Target would carry more than 150 items inspired by Universal’s movie “Wicked,” including clothing, food, beauty items and toys. It will also drop an exclusive vinyl and book for Taylor Swift fans on Black Friday.

Target will also lean on a tried-and-true retail tactic to try to drive traffic: It will cut prices on 2,000 additional items for the holiday season, after reducing them on 5,000 items earlier this year.

Wants and needs

GlobalData’s Saunders said Target, Kohl’s and department stores such as Macy’s are in a tougher spot this holiday season, since they sell more wants than needs.

Customers have “more of a tilt towards experiences” this year and want to buy gift items that have practical value.

“The little stupid games and novelty socks and things — those are the areas where people are really cutting back a bit because they’re just meaningless 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 companies may have bought too much inventory headed into the shopping season — or the wrong mix of items. At Kohl’s, for instance, Saunders said he’s seen a lot of clothing and small appliances such as coffeemakers and air fryers on display as the retailer gets ready for Black Friday. If shoppers don’t show up in full force, those items could wind up on the clearance rack.

“I’m just looking at it and thinking ‘Is this going to sell through?'” he said. “Because you’re not getting the foot traffic into stores already. So why is that going to change over 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 the perception of “the best bang for the buck” with items that have novelty or quality.

And, he added, retailers are already teeing up external factors to blame in the event their holiday season underwhelms.

“Every year, retailers always position themselves to have a good reason why they may not make their numbers,” Cohen said. “So when they talk about the weather, or they talk about a dock strike, or they talk about supply chain issues, it has more to do with the fact that they’re hedging their bet that they may have some challenges ahead.”

“I always say, ‘OK, here comes the excuse this year. What’s 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.