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 week ended June 7.
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 Specialty Retail
| American Eagle Outfitters (NYSE: AEO) 1Q20 | |
| Commentary | As of June 3, the retailer has reopened 556 stores. On average, its reopened stores have achieved 95% of last year’s sales productivity. In the first quarter, digital revenues were up 9%. AEO's online demand (as measured by ordered sales) increased by 33%. By brand, Aerie rose 75% and American Eagle (AE) increased 15%. The company leveraged ship-from-store capabilities in 250 stores to help meet online demand. High-performing categories included AE's jeans, joggers and fleece, and Aerie’s leggings, fleece, bralettes and swimwear. Marketing on social media included AE's “Stay-at-Home Concert” series and Aerie’s body positivity challenge on TikTok, which gained over 2 billion impressions. |
| Outlook | The retailer said it will introduce new back-to-school (BTS) merchandise in July and said it believes its commitment to offering new collections will be a market differentiator. The company is still planning to open 25 Aerie stores this year. Management reported that there is an opportunity to optimize its fleet of 1,093 stores as the average lease life is less than four years and half of its fleet’s leases are expiring by the end of 2021. The company said it plans to provide more detail on this. AEO did not provide financial guidance. |
| Gap Inc (NYSE: GPS) 1Q20 | |
| Commentary | Net sales were down 43% year over year in the quarter. Online sales increased by 13% for the quarter, with over 100% growth in online sales during May. Over 1,500 stores have reopened in North America. In May, reopened stores in North America are generating sales at nearly 70% on average across the company’s banners (Gap, Athleta, Banana Republic and Old Navy), compared to their performance last year—with particular strength at Old Navy. CFO Katrina O’Connell said: “Old Navy is positioned in off-mall locations, where the customer is likely more confident shopping as well as the curbside pickup capability is easier to activate, we're seeing a meaningfully better trend in productivity at our Old Navy stores.” Management also attributed Old Navy's recovery to its value proposition for the entire family and its strength in categories including active, fleece and denim. The company doubled the way that customers can shop by expanding BOPIS (buy online, pick up in store) capabilities to include curbside pickup, as well as a new virtual concierge that Athleta is testing, offering customers the chance to have one-on-one digital interactions with a store associate. |
| Outlook | The company provided directional outlook comments. Management expects total net sales to remain lower year over year with sequential improvement from first-quarter trends. Online is expected to continue to grow strongly, with some adjustments as customers orient to having an in-store option. The company expects fulfillment costs to be elevated in the second quarter, driven by two factors: First, with a subset of stores still closed, online sales growth is expected to be outsized; and second, a meaningful amount of online demand will be fulfilled through stores (which is generally a more expensive fulfillment option). |
Home and Home-Improvement Retailers
| RH (NYSE: RH) 1Q20 | |
| Commentary | RH’s adjusted revenues declined 19.3% year over year, significantly impacted by the closure of its galleries, restaurants and outlets from March 17 through the rest of the quarter ended May 2. Total company demand, which includes restaurants and outlets that do not have an online segment, declined by approximately 17%, while core business demand, which includes Baby & Child plus Teen, declined by approximately 11%. RH’s business trends have seen improvement week over week from late March through the end of the quarter. The company attributes this to the strength of its multichannel platform and its membership model, which allowed RH to engage with customers virtually. RH disclosed its plans to further invest in enhancing its digital capabilities. |
| Outlook | In May, RH’s core business demand increased by 7% with considerably higher product margins. Demand growth accelerated to 11% in the first week of June. As of June 3, RH has reopened about 74% of its galleries, 68% of its outlets and 50% of its restaurants. The company said that the business trends will continue to improve during the second quarter as the rest of its galleries reopen; RH also plans to open new Design Galleries in Charlotte and Marin in mid- to late June. CEO Gary Friedman said that demand growth could accelerate up to 25% as RH opens more galleries. However, the retailer forecasts revenue growth to lag demand growth by 10–12 percentage points in the second quarter. The spread between demand and revenues is mainly due to dislocation of the supply chain. When the crisis hit, RH aggressively reduced its inventory and canceled orders. There were then factory shutdowns that disrupted the whole supply chain. Friedman said, “There were back orders building, and then we have to try to catch up with an increasing demand—demand way better than we initially thought. We could have never forecasted what happened in the first two to three weeks of the pandemic.” RH expects a positive impact to its revenues in the second half of the year as production recovers and inventory receipts catch up to demand. For the full-year 2020, the company expects the reduction of outlet sales year over year to cause an approximate four-percentage-point drag to total company revenues. |
Key Insights
With the e-commerce channel helping retailers to offset some of the lost sales from brick-and-mortar store closures and reduce in-store inventory, some retailers are looking to strengthen their digital model, including through the expansion of BOPIS and ship-from-store capabilities. However, rising digital penetration will elevate fulfillment costs and pressurize gross margins.
Apparel specialty retailers are witnessing high sales productivity of reopened stores as a percentage of their performance last year. Gap Inc. expects its net sales to improve sequentially in the second quarter, while AEO remains optimistic for the BTS season.
Home-goods retailer RH saw consumer demand for its core business growing by double digits in the first week of June, but it expects revenue growth to lag demand growth in the second quarter.
Many retailers have not provided full-year financial guidance owing to the 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. As stores reopen and consumers return to spending, we are seeing notable pent-up demand in the retail industry. However, we believe that the retail environment will witness substantial markdowns to reduce inventory and see a period of heightened promotions as the industry addresses the repercussions of closed stores during the Covid-19 crisis.