Beauty & Wellness Briefing: Student loan payments put a damper on holiday (sales) cheer

The reason is that student loan payments resume in October, just before the holiday season. Student loans have steadily held their place in headlines since the end of June when the Supreme Court struck down the Biden Administration’s carte blanche ability to cancel student loan debt. Since then, the Biden Administration has taken a piecemeal approach where it can. Most recently, it canceled $9 billion in debt for borrowers enrolled in public-service and income-based loan repayment programs, as well as borrowers with disabilities. In total, the Biden Administration has wiped out $127 billion in student loan debt, approximately one-third the amount of the struck-down plan. And there are both implied and realized impacts that brands and retailers will face with student loans resuming this month.

According to the Federal Reserve, 43 million Americans hold more than $1.75 trillion in student loans. More granularly, 55% of people under 30 years old who went to college took on some debt for their education, such as student loans. And 17% of those with education debt were behind on their payments in 2019. Of those making payments, the typical monthly payment was between $200-$299.

The National Retail Federation expects student loan repayments to be an incremental headwind to consumer spending, with people reducing discretionary spending but continuing to spend on essentials. Essential retailers should likely fare better than discretionary retailers. Likewise, retailers that cater less to younger demographics should outperform businesses catering to millennials and Gen-Z, according to an NRF spokesperson. The upcoming holiday shopping season is likely when the impact of student loan repayments will be seen in their fullest effect. Deloitte surveyed 4,318 U.S. consumers to determine what can be expected as people tackle their holiday shopping and found that 17% of survey takers said they have student loans to repay starting this fall. Of those who will start loan repayment, nearly half said that, when these payments start, they will adjust spending by cutting back on holiday expenditures. Meanwhile, 37% say they’ll adjust by cutting back on nonholiday expenditures. That said, 32% stated: “I am not changing my holiday spending plans.”

“[Shoppers] plan to frequent their favorite retailers and focus their shopping during the traditional late fall period. But with customers planning to shop over fewer weeks, retailers have a shorter amount of time to gain consumers’ attention, highlighting the importance of the November promotional events this holiday season,” said Brian McCarthy, principal at Deloitte Consulting LLP.

Old Navy is already feeling the pinch. Old Navy’s parent company, Gap Inc., reported in its second-quarter earnings in August that it revised its third-quarter and fiscal 2023 sales projections to reflect a decline in the mid-single-digit range compared to the $15.6 billion in 2022 net sales. The company cited uncertain consumer trends in the marketplace including student loan repayments. Gap Inc. said that student loan repayments primarily impact the Old Navy consumer.

“The consumer pressure is most acute at Old Navy. … Whether it’s the low-income consumer starting to get real wage pressure from inflation or whether it’s the new student loan dynamic, we’ll see how that plays out for Old Navy,” said Katrina O’Connell, CFO of Gap Inc.

Ahead of the holidays, brands and retailers have enacted a few different strategies as a result of student loan repayments. Some are more directly consumer-facing, while others are more behind-the-scenes. In the case of E.l.f. Beauty, the company has decided not to make additional pricing increases in the U.S. However, it may increase prices internationally to catch up to the pricing increases in the U.S. in March 2022. Meanwhile, Macy’s and Target took different approaches in the lead-up to student loan payments resuming. During the company’s second-quarter earnings in August, Target executives said the retailer was “leaning into affordability as well as proximity” to college-bound students. Target said top-line comparable sales for the third quarter would decline in the mid-single digits, consistent with what the company saw in July and the second quarter.

Macy’s took a different approach, focusing on its credit card holders instead. According to the company’s second-quarter earnings in August, Macy’s saw a higher rate of payment delinquencies and aged balances among credit card holders after the first quarter, predominantly in June and July. To that end, Macy’s worked with its credit card partner, Citibank, to target high-risk segments and “surgically reduce exposure” by writing off the bad debt, said Adrian Mitchell, COO and CFO of Macy’s, on the call. Macy’s pays attention to the debt/service ratio, which it uses as a proxy for the consumer’s ability to pay debt using disposable income. Mitchell noted that credit card debt, student loans, auto loans and mortgages all converged as issues for Macy’s customers in September and October. Year to date, Macy’s credit card sales are down about 24% from a year ago. Citi analyst Paul Lejuez said credit card sales represented 49% of Macy’s operating profits in 2022, compared to 58% of Macy’s operating profits in 2019. That indicated that customers were canceling cards or spending less, or Macy’s was writing off bad debt.

“The customer is coming under pressure because these are new realities they have to continue to deal with as we get through the back half of this year and move into next year,” he said. “[Lower revenue from] credit cards indicate some of the pressures we’re seeing on the consumer.”

According to Glossy’s previous reporting, total U.S. credit card debt has surpassed $1 trillion this year, the highest it’s ever been. Roughly 50% of Macy’s customers have an average household income of $75,000 or under, while 85% earn $150,000 or under. According to PYMNTS Holiday Shopping 2023 Report, 41% of consumers plan to use installment plans, also known as buy-now, pay-later, to purchase holiday gifts this year.

While reading the tea leaves on holiday shopping indicates subdued holiday cheer, the broader and quantifiable impacts on holiday shopping are difficult to know ahead of time. And it is equally difficult to directly attribute any changes in shopping behavior to student loan payment resumption. But the point remains that retailer enthusiasm surrounding the holidays is somewhat muted. Retailers plan to hire fewer seasonal workers than prior holiday seasons, and many have dropped incentives to attract workers. Macy’s aims to hire 38,000 workers, 3,000 below its 2022 plan.

“Historically, it’s been difficult to tease out any economic or stimulus shift and how [it will] directly impact the [beauty] category or our business. [But] our business and the category itself has been largely resilient. Not immune, but largely resilient,” said Dave Kimbell, CEO of Ulta Beauty, during the company’s second-quarter earnings call in August where it reported a year-over-year net sales increase of 10.1% to $2.5 billion.

Inside our coverage:

Amanda Baldwin steps in as new Olaplex CEO.

Jo Malone chats her second act, Jo Loves.

MAC Cosmetics taps TikToker for runway show.

What we’re reading:

Should beauty brands have runway shows?

Determining if Rite Aid bankruptcy impacts beauty.

How #GRWM came for our bathrooms.