albert Chan
Introduction
Our weekly Earnings Insights reports look at key commentary from major US retailers and brand owners on the impact of the coronavirus crisis on 1Q20 performance (ending April 30 for most companies). Companies featured are those within our Coresight 100 coverage list, and in this report we focus on those that reported in the weeks ended May 17 and May 24.
From February, US brands and retailers began to see negative impacts on sales due to the coronavirus outbreak—which also disrupted supply chains, with orders shifting and being delayed. In March, stores for nonessential and discretionary items were closed for the second half of the month, substantially impacting sales and earnings. April then proved to be the most challenging month for retail sales, as the coronavirus outbreak forced the total shutdown of nonessential commerce nationwide and the crisis depressed demand for discretionary goods.
We assess the recent performance of retailers in more detail below.
Apparel and Footwear Brands
| VF Corporation (NYSE: VFC) 4Q20 | |
| Commentary | VF's fourth-quarter revenues declined 10% year over year at constant currency, which it mainly attributed to lower consumer demand. In its US wholesale business, which represents about 25% of the company’s total revenue, VF Corporation has dramatically reduced exposure to the more structurally challenged mid-tier and department-store channels, which now represent less than 5% of its revenues. Management said that VF’s total digital footprint—which comprises 20% of total revenues—has been critical in driving consumer engagement during the lockdown period. |
| Outlook | For the first quarter of fiscal year 2021, VF expects its revenues to decline by more than 50%. In the medium to long term, M&A remains the brand's top strategic and capital allocation priority, as it believes the disruption across the sector will provide sufficient opportunities to identify valuable businesses. |
Apparel Specialty Retail
| L Brands (NYSE: LB) 1Q20 | |
| Commentary | L Brands’ revenues decreased by 37%. Bath & Body Works’ online business increased by 85%, and comps increased 20% during the period in which stores were open. As stores closed, the online business saw a significant increase. E-commerce sales were up 33% for the month of February, 60% for the month of March and 150% for the month of April. The company reported that the increase was primarily driven by soaps and sanitizers, which reported comp growth of over 300%, more than doubling the rate of penetration from last year. |
| Outlook | For fiscal year 2020, L Brands plans to close 250 Victoria’s Secret and Pink stores in the US and Canada. The company said that it is still committed to its go-forward strategy to establish Bath & Body Works as a pure-play public company and is taking the necessary steps to prepare the Victoria’s Secret Lingerie, Victoria’s Secret Beauty and PINK businesses to operate as a separate, standalone company. |
| Ross Stores (NYSE: ROST) 1Q20 | |
| Commentary | Ross Stores’ sales were down 51.5% for 1Q20 due to store closures; the company reported its first quarterly operating loss in 30 years. Ross Stores drew down $800 million on its revolving credit facility, completing a $2 billion public bond offering, suspending its stock repurchase program and aggressively cutting costs. Average in-store inventories were up 1% at quarter end versus the same period last year. On May 14, Ross Stores began a phased process of reopening stores on a market-by-market basis. Approximately 700 of the company’s 1,832 total stores have reopened to date, with the remaining stores expected to be reopened over the coming weeks. |
| Outlook | Ross Stores did not provide a financial outlook but did estimate that there will be a negative impact on consumer demand throughout the remainder of the year. However, management reported that it feels the company is well positioned in the off-price sector and believes consumers will continue to favor retailers focused on delivering both value and convenience. Given the significant uncertainty of consumer behavior and shopping patterns as stores reopen, Ross Stores will not open new stores in the current quarter and now expects to open about 39 stores this fall, for a total of 66 new stores for the full year 2020. |
| The TJX Companies (NYSE: TJX) 1Q21 | |
| Commentary | TJX reported a 5% consolidated comp increase in February before closing stores and online business in mid-March. It reported that revenues were down 52.5% in the first quarter. TJX has reopened more than 1,600 of its stores worldwide to date; initial sales have been above last year's levels across all states and countries for the 1,100 stores that have been reopened for at least a week. The company is seeing strong demand at HomeGoods and in-home categories across all banners. |
| Outlook | TJX did not provide a financial outlook but highlighted the strength of its business model in this environment, with the ability to expand and contract quickly based on consumer preferences. The company emphasized that over 50% of 2019 revenues were from non-clothing categories, which speaks to its wide assortment. TJX expects most of its 4,500 stores to be reopened by the end of June. |
| Urban Outfitters (NasdaqGS: URBN) 1Q20 | |
| Commentary | In the first quarter, Urban Outfitter’s sales declined 31.9% year over year, driven by negative store sales due to store closures, partially offset by low-double-digit growth in the digital channel. The retailer filled over 2 million digital shipments from its stores during the quarter. Management reported that the company’s overperforming categories were “home product and casual apparel,” while “dresser apparel and special occasion products” underperformed. As of May 19, Urban Outfitters’ stores in North America were down about 50% in sales and about 65% in traffic. However, the company is seeing its online comps growing more than 30% in North America through May. In the last six weeks ending May 19, total new online customers grew by 63%, producing double-digit increases in sessions and demand. |
| Outlook | For the second quarter, Urban Outfitters expects overall store sales to be down 25–30%, which could improve to 20% declines in the back half of the year. The retailer expects total comp store sales in the second quarter to be down by more than 60%. The company expects its direct business to continue to grow in the second half of the year, due to a rise in new customers. |
Department Stores
| Kohl's (NYSE: KSS) 1Q20 | |
| Commentary | In the first quarter, Kohl's revenue declined 40.6% year over year. In response to the coronavirus outbreak, the company decreased planned capital expenditures and drew down in revolving credit, ending the quarter with $2 billion. Kohl's closed its stores on March 20 but leveraged its 50 million customers in new ways using personalized emails. Digital sales increased 24% for the quarter, and growth accelerated to 60% in the month of April. More than 40% of digital orders were fulfilled by ship-from-store and customer pickup during the first quarter, helping to reduce in-store inventory. The company’s “Store Drive Up” proved successful; in over 900 stores where it is offered, the percentage of digital demand fulfilled by Store Drive Up was 15%, exceeding that of “buy online, pick up in store” (BOPIS) before the Covid-19 crisis began. On stores that have reopened, CEO Michelle Gass said: “As the stores have been opening, they've been doing 50% to 60% of productivity that we would typically see at this point in time” and that “where they started at 50% to 60%, we've actually seen them ramp up in their second week.” |
| Outlook | Management expects gross margin to be pressured due to lower sales volume as stores reopen—and the cost of shipping may increase, with digital penetration forecasted to remain elevated. Kohl's is also planning for a heightened promotional environment as the industry addresses repercussions of closed stores during the coronavirus crisis. |
Electronics Retail
| Best Buy (NYSE: BBY) 1Q20 | |
| Commentary | Best Buy’s domestic revenues declined 6.7% year over year in 1Q20, driven by a comp decline of 5.7% and revenue loss attributed to 24 permanent store closures in the past year. Comps in the services category declined 16%. By merchandise line, Best Buy saw growth in its computing and gaming categories in the first quarter, but this was more than offset by declines in home theater, mobile phones and digital imaging categories. The company highlighted that there was a significant spike in demand for its wide range of digital health and fitness products. In the middle of 1Q20, Best Buy pivoted its stores to a curbside-only operating model. During the last six weeks of the quarter, it was able to retain around 81% of sales versus the same period last year, despite having no store traffic. The company reported that domestic e-commerce sales grew 155% in 1Q20 and 300% year over year during the six weeks that it ran its curbside-only model. |
| Outlook | Best Buy did not provide financial guidance owing to the ongoing uncertainty pertaining to the coronavirus crisis. However, the company mentioned that it will continue to focus on managing its profitability and liquidity and will look to balance its short-term decisions to negotiate the current unprecedented challenges with its core long-term strategies. In the second quarter, Best Buy expects that e-commerce sales will remain high as a percentage of overall sales and that operating income will experience a year-over-year decline. The company stated that it will also adopt a variety of operating models during the second quarter that are suited to local market conditions; it will prioritize the safety of its employees and customers. For the full fiscal year 2020, the company now expects capital expenditure of $650–750 million versus prior guidance of $800–900 million. |
Food, Drug and Mass Retailers: Mass Merchandisers
| Target (NYSE: TGT) 1Q20 | |
| Commentary | Target’s first-quarter revenue rose 11.3% year over year. The retailer’s digital comparable sales grew 141%, driven by DriveUp and other programs that offer BOPIS and same-day delivery services. Target saw the strongest growth in hardlines, which saw comps increase more than 20%: Electronics grew by over 45%; food and beverages increased by more than 20%; and essentials and beauty saw high-teen comp growth in percentage terms. The retailer’s two highest-margin categories, home and apparel, saw slower trends. Home saw high single-digit comp growth, while in the apparel segment, comps declined by 20% due to softer sales from late March to early April, followed by a resumption of growth in the last two weeks of April. |
| Outlook | Target withdrew its full-year financial guidance. Management said that the company is trying to build flexibility into plans and commitments, and it will pursue a strategy based on investments to enhance both physical and digital shopping. Target temporarily slowed plans for remodels and new stores because of the uncertainty related to the coronavirus crisis. |
| Walmart (NYSE: WMT) 1Q21 | |
| Commentary | Walmart US store comps grew 10% in the first quarter (15% and 9.5% respectively for March and April), led by strength in food, consumables, health and wellness, and some general merchandise categories. Walmart US e-commerce sales grew by 74%, driven by grocery pickup and delivery. There was an unfavorable shift in category mix that impacted gross margin—increased sales of lower-margin food and consumable categories and softer sales in higher-margin categories like apparel that saw sales decline of about 14% in the quarter. Inventory declined about 6% in the first quarter, reflecting higher-than-normal out of stocks in some categories. International net sales increased by 7.8% at constant currency, with nine of 10 markets posting positive comp sales. |
| Outlook | Walmart withdrew its full-year financial guidance, which reflected uncertainty around several key factors, including the duration and intensity of the coronavirus crisis, the length and impact of stay-at-home orders, the scale and duration of economic stimulus, employment trends and consumer confidence. In the earnings conference call, management said that it is seeing uplift from US government stimulus spending, which it expects to continue through part of the second quarter. Walmart will discontinue Jet.com, as it struggles to grow its e-commerce-only operations. |
Food, Drug and Mass Retailers: Warehouse Clubs
| BJ’s (NYSE: BJ) 1Q20 | |
| Commentary | In the first quarter, BJ’s saw comps ex gas up 27.0%, which included a 350% increase in digital sales that contributed five percentage points of that comp growth. Digital sales were driven by same-day delivery and BOPIS services. Grocery comparable sales grew 33%; general merchandise sales and services revenues fell 3%. Management noted that grocery goods, which represent roughly 85% of BJ's merchandise sales, were in extremely high demand from February and through the quarter. Shoppers consolidated their trips and bought bigger baskets due to increased consumption at home. Management said that it has not yet seen a meaningful deceleration in sales, pointing to strong food demand as consumers are unable to dine in restaurants, as well as the widespread shift to working at home. |
| Outlook | BJ’s exited 1Q20 with a merchandise comp (ex gas) above 20%, which has not slowed in May. Full-year comp growth will not be as strong, but previous annual guidance of low-single-digit comps is now considered to be “considerably low.” EVP and Chief Financial and Administrative Officer Robert Eddy said that BJ's expects to see strong growth in memberships as “new members will be easier to acquire in this environment.” However, he said, “It is extremely difficult for us to predict how the year will play out.” |
Home and Home-Improvement Retailers
| Lowe’s (NYSE: LOW) 1Q20 | |
| Commentary | Lowe's sales grew 11.3% year over year in 1Q20, while comps grew 11.2%. Comps for the company’s US home improvement business grew 12.3% with strong performance in both DIY and Pro segments. DIY comp outpaced Pro comp slightly, driven by the arrival of spring weather in many western and southern regions, along with increased interest among consumers towards home improvement projects. The company estimates that coronavirus-related sales accounted for 850 basis points in total comps growth, with 700 basis points attributed to acceleration of projects mainly among DIY customers, 80 basis points of cleaning product sales and 70 basis points of refrigerator and freezer sales. Total e-commerce sales grew 80%, with the growth rate for online sales among Pro customers being even stronger. Online penetration grew to 8% of total sales. All 15 geographic regions and all three US divisions saw broad-based growth to positive comps. |
| Outlook | Although Lowe’s first-quarter performance has been strong, the company decided to withdraw its full-year guidance for sales, operating income and EPS, owing to limited visibility into the future economic environment. However, the company expressed confidence regarding the future of its business and its ability to drive long-term shareholder value sustainably. |
| Home Depot (NYSE: HD) 1Q20 | |
| Commentary | Total comparable sales grew by 6.4% and US comps by 7.5%. E-commerce sales grew 80% in the quarter, with customers opting to pick up their online orders at a store more than 60% of the time. Home Depot expanded its curbside pickup capabilities during the quarter, giving customers an additional outlet for fulfillment. Home Depot reported that in the three-week period between late March and early April, it saw a double-digit comp decline as a result of measures to curb store traffic, with higher-volume stores underperforming lower-volume stores by more than 30 percentage points in some areas. However, as customers turned to repairs and home improvement projects, the last three weeks of April and the first two weeks of the second quarter saw a significant acceleration, resulting in double-digit comp growth. |
| Outlook | Home Depot suspended its guidance for fiscal year 2020. However, the company clarified that this is more a reflection of the multiple potential outcomes for the economy and its business rather than a reflection of the state of demand for home improvement. Home Depot stated that its strategic investments have positioned it well and that it is in a strong financial position to withstand challenges. Home Depot expects to come out of the crisis stronger. |
Key Insights
While the success of the e-commerce channel is certainly helping retailers to offset some of the lost sales from brick-and-mortar store closures and reduce in-store inventory, many companies’ gross margins will be pressured by the cost of shipping due to increasing digital penetration. As such, retailers are already operating, or considering the implementation of, several omnichannel options, such BOPIS and curbside pickup.
Many retailers did not provide, or withdrew, their full-year financial guidance, reflecting uncertainty around several key factors, including the duration and intensity of the coronavirus crisis, consumer confidence, employment trends, the scale and duration of economic stimulus and the length and impact of stay-at-home orders.
April can be expected to be the trough in consumption, with lockdowns easing and stores reopening in May. However, we expect that the future recovery in retail sales will be slow and gradual as reopening occurs in phases and consumers return to spending with caution. We believe that the retail environment will see a period of heightened promotions as the industry addresses repercussions of closed stores during the Covid-19 crisis.