albert Chan
Introduction
Our weekly Earnings Insights reports look at key commentary and qualitative insights from major US retailers and brand owners on their recent revenues and comps, and the impact of the Covid-19 pandemic on 1Q22 performance (ended April 30, 2022, for most companies).
Companies featured are those on our Coresight 100 list, and we focus on those that reported in the week ended May 8, 2022. For most US retail companies covered in this series, the quarter under review will be the 1Q22.
In January 2022, US retail sales increased by a revised 9.4% year over year, suggesting that the economy is continuing to grow despite inflation and concerns of a looming recession. In February 2022, US retail sales increased by a revised 13.1% year over year, boosted by another strong month of job creation, as average hourly wages continue to rise within the still-tight labor market. In March 2022, US retail sales increased by 4.0% year over year, against strong 2021 comparatives. However, 4.0% growth amidst a backdrop of high inflation points to a slowdown in consumer spending. US retail traffic saw growth of 16.5% year over year in March 2022—lower than February’s growth of 31.9%, with trends affected by intense winter storms.
We assess the recent performance of selected retailers below.
Apparel and Footwear Brand Owners
Overall, apparel and footwear brand owners continue to witness solid sales growth momentum. In the latest quarter, Crocs and Gildan Activewear reported strong double-digit sales growth year over year, while Hanesbrands reported single-digit sales growth. However, Carter’s reported a low-single-digit sales decline in its first quarter. Last week, we saw Columbia Sportswear Company, Levi’s and Skechers report double-digit sales growth year over year.| Carter’s, Inc. (NYSE: CRI) 1Q22 | |
| Commentary |
Carter’s reported a 1.0% year-over-year revenue decline in its first quarter, versus 7.3% growth in the prior quarter. Diluted EPS was flat compared to the same quarter of fiscal 2021. The company’s gross margin was down 440 basis points (bps) year over year to 45.4% due to the higher inbound transportation costs, which increased nearly 60.0% over last year. By segment, US retail revenue declined by 10.0% year over year, reflecting the tougher comparison to last year's stimulus-led spending and the later Easter holiday this year; US wholesale revenue increased by 8.0% year over year and international revenue increased by 11.0%. In the US Wholesale segment, Carter’s continues to see good product demand in retailers such as Walmart, Target and Amazon because these retailers became one-stop shopping for essential products during the pandemic. The company’s toughest comps were in the Midwest and Northeast, where cold weather has not yet prompted consumers to shop for warm-weather apparel. Overall, the company is seeing consumers refreshing their children’s outfits in anticipation of summer vacation and reconnecting with families and friends. On the supply chain side, the company is now routing over 60.0% of its imports through the East Coast with good results. The East Coast ports are less congested than the West Coast, resulting in quicker receipt processing for the company. |
| Outlook | For fiscal 2022, the company has estimated product costs to be up 7.0%. The company expects freight costs will be up over 10.0% this year, as ocean freight rates have more than doubled since last year and the company has ocean freight rate contracts for about 90.0% of its unit volume through the first half of 2023. The rates under those contracts are less than half the current spot market rates. The company reaffirmed its fiscal 2022 guidance of net sales growth of 2.0%–3.0% year over year and adjusted EPS growth of 12.0%–14.0% year over year. Over the next five years, the company plans to open more than 100 stores in the US. In 2022, the company plans to open 30 stores and close 20. The company’s store-opening focus will be on high-traffic, open-air centers that provide convenience for online shoppers, including curbside pickup. Nearly 30.0% of the company’s online orders in the first quarter were fulfilled by stores, and it expects stores to fulfill 40.0% or more of its online orders within the next five years. |
| Crocs, Inc. (NasdaqGS: CROX) 1Q22 | |
| Commentary | Crocs posted sales growth of 43.5% year over year, versus 42.6% growth in the previous quarter. Adjusted EPS increased by 37.6% year over year. The company’s gross margin decreased by 580 bps year over year to 49.2% due to incremental air freight costs. Crocs brand digital sales grew 20.3%, representing 32.8% of Crocs Brand revenues, versus 32.3% in the prior year. HEYDUDE brand’s (acquired by the company on February 17, 2022) digital penetration was 25.9% of HEYDUDE brand revenues. By distribution channel, the direct-to-consumer (DTC) business, which includes retail and e-commerce, grew 34.6% year over year, and wholesale revenues grew 48.7%. By geography, the Crocs brand’s Americas’ revenue increased by 19.5% versus the first quarter of 2021 (1Q21), wherein DTC revenue increased by 18.5% on top of 131.3% growth last year. EMEA’s (Europe, Middle East and Africa) and Latin America’s combined revenue increased by 26.8% year over year, wherein DTC revenue increased by double-digits. Meanwhile, Asia’s revenue increased by 22.1% year over year. Within Asia, India, Singapore and South Korea all posted strong double-digit revenue growth versus last year. |
| Outlook | For fiscal 2022, the company expects revenue growth of between 52.0% and 55.0% compared to 2021. It expects revenue growth for the Crocs Brand to exceed 20.0% compared to 2021 and revenue for the HEYDUDE Brand to be approximately $750–800 million. The company expects its gross margin to include an incremental $75 million in air freight costs in the first half of 2022. It expects its adjusted operating margin to be 26.0%–27.0% and adjusted EPS growth of 20.8%-28.0% year over year. Crocs expects the macro environment to remain challenging with the backdrop of high inflation, rising interest rates and supply chain disruptions, but the company has tremendous confidence in both the Crocs and HEYDUDE brands. For the second quarter of fiscal 2022, the company expects revenue growth of 43.0%–49.0% year over year. It expects revenue growth for the Crocs brand to be 12.0%–15.0% compared to 2021 and revenue for the HEYDUDE brand to be approximately $200–220 million. |
| Gildan Activewear Inc. (TSX: GIL) 1Q22 | |
| Commentary | Gildan’s sales increased by 31.0% year over year, versus 14.0% growth in the prior quarter, driven by volume growth and net selling price increases. Adjusted EPS increased by 58.3% year over year. Adjusted gross margin was down 20 bps year over year to 30.9%, as the company received a one-time cotton subsidy last year, which benefited gross margins in 1Q21 by 300 bps. Excluding this benefit, the company’s adjusted gross margin expanded by 280 bps in 1Q22. By category, activewear sales were up 38.0% year over year, driven by volume growth, net selling price increases and a favorable product mix. Activewear volume growth reflected strong demand in North American markets, particularly in the distributor channel, partly offset by lower international shipments due to ongoing demand weakness in Europe and Asia. Hosiery and underwear sales increased by 3.0% over last year, driven by higher selling prices. By geography, US sales increased by 34.5% year over year, and Canada sales increased by 33.6% year over year. Meanwhile, international sales increased by 4.5% year over year. Recently, although the company has seen some deceleration in sell-through over the last few weeks tied to broader economic considerations, the overall demand for activewear remains healthy. The company has started to see some sell-through slowing for specific products in the hosiery and underwear category that could be related to broader economic factors, including the lack of stimulus checks and other support payments which consumers received in 2021. |
| Outlook | The company feels pleased with the start to the year and the progress it can make in 2022 as it moves forward with the Gildan's Sustainable Growth (GSG) strategy, which is focused on driving growth, margin performance and its previously communicated outlook for sales and margin performance from 2022–2024. The GSG strategy outlook reflects three-year net sales CAGR in the 7.0%–10.0% range and annual operating margins in the 18.0%–20.0% range. |
| Hanesbrands (NYSE: HBI) 1Q22 | |
| Commentary | Hanesbrands reported a 5.0% year-over-year increase in sales versus 4.0% growth in the prior quarter, driven by continued strong consumer demand. Adjusted EPS declined by 12.8% year over year. The company’s adjusted gross margin declined by 305 bps year over year to 37.1% due to the expected impact of higher inflation and “the higher-than-planned strategic investment in expedited freight to service new retail space gains and new product innovation.” By segment, innerwear sales increased by 1.5% year over year, on top of 35.0% growth last year, driven by retail space gains, a positive mix benefit and the partial-quarter benefit of price increases. Activewear sales grew 6.3% year over year, wherein Champion brand’s sales were consistent with the prior year. Champion was able to comp last year’s strong growth in the segment due to strong consumer demand. However, product delays resulted in around $40 million of in-hand orders going unfulfilled in the quarter. Had the product arrived on time, Champion sales in the US would have increased at a high-teens rate. Sales of other activewear brands increased by mid-teens year over year. In the quarter, Champion launched its “Win with Women” campaign, continuing to expand product offerings for younger female consumers. The campaign celebrates women in sports and aims to fuel women’s confidence. US innerwear sales increased by 1.5% over the prior year, driven by retail space gains, price increases and product mix. Inventory at the end of the first quarter of 2022 was $1.8 billion, a 22.0% increase year over year, due to the combination of higher levels of in-transits, the impact of inflation on input and transportation costs, and the strategic decision to invest in inventory in the quarter to rebuild safety stock. |
| Outlook | The company is experiencing incremental costs to move materials within its network, while the latest Covid-19-related challenges are putting additional pressure on demand and supply chain costs. These increased challenges have created an additional $140 million of cost headwinds in the company's 2022 business. For fiscal year 2022, Hanesbrands expects net sales of $7.0–7.2 billion, which includes a projected headwind of approximately $125 million from changes in foreign currency exchange rates. At the midpoint, this represents 4.0% growth year over year. It expects adjusted EPS to be in the range of $1.64–$1.81, representing growth of 10.8%–22.3% year over year. For its second quarter of 2022, the company expects net sales between $1.68 billion and $1.73 billion. At the midpoint, this represents around 3.0% sales decline year over year. It expects adjusted EPS to be $0.32–$0.36, representing a decline of 23.4%–31.9% year over year. |
Beauty Brands and Retailers
Beauty brand owners are enjoying solid sales growth, with Estée Lauder reporting strong double-digit sales growth year over year in its latest quarter. Last week, we covered L’Oréal reporting double-digit sales growth year over year.
| Estée Lauder Companies (NYSE: EL) 3Q22 | |
| Commentary | Estée Lauder reported a 10.0% year-over-year increase in sales versus 14.2% growth in the prior quarter. Meanwhile, organic sales increased by 9.0% year over year and adjusted EPS increased by 17.0% year over year.The company’s operating income increased by 15.0% year over year, and its operating margin expanded by 110 bps to 21.6%, reflecting higher net sales and a favorable impact from a stronger US dollar.By geography, organic net sales in the Americas increased by 11.0% year over year, with all markets and product categories contributing to growth. In Europe, the Middle East and Africa (EMEA), organic net sales increased by 18.0% as growth was realized across most markets, channels and brands. Organic net sales declined by 4.0% in the Asia-Pacific region due to Covid-19 lockdowns in Mainland China.By category, fragrance’s organic net sales grew 31.0% year over year, with sales growth in every region and across all brands. Hair care’s organic net sales increased by 17.0%, reflecting increases from both Aveda and Bumble and bumble as brick-and-mortar salons and retail stores recover. Makeup’s organic net sales increased by 12.0%, reflecting continued progression toward recovery in western markets and increased usage occasions. Skincare organic net sales increased by only 3.0% year over year due to sales decline in the Asia-Pacific region, which was affected by transitory logistics constraints in China.The CEO, Fabrizio Freda, said, “Estée Lauder brand entered the metaverse as connecting with our consumer wherever they are is paramount, and we are excited to be testing and learning in this new ecosystem. Estée Lauder was the exclusive beauty brand partner of Decentraland Metaverse Fashion Week, the first ever large virtual fashion week in an unchanged metaverse.” |
| Outlook | Due to Covid-19 restrictions in Mainland China and the impact of the Russia-Ukraine war, Estée Lauder revised its fiscal 2022 revenue growth guidance and now expects high-single-digit growth year over year, compared to its prior guidance of double-digit growth. The company expects adjusted EPS growth to be 8.0%–10.0% on a constant currency basis.According to the company, eliminating sales in Russia and Ukraine has reduced expected fourth-quarter sales growth by 120 bps. |
| The Clorox Company (NYSE: CLX) 3Q22 | |
| Commentary | The Clorox Company reported a net sales increase of 2.0% year over year versus sales decline of 8.0% in the previous quarter. Net sales growth reflects higher shipments across all reportable segments. Adjusted EPS declined by 19.0% year over year due to lower gross margin, partially offset by lower advertising spending and higher net sales. Gross margin decreased by 760 bps to 35.9% due to higher manufacturing and logistics costs and commodity costs. The company’s CEO, Linda Rendle, said, “We saw continued strong demand for our products this quarter and delivered sequential gross margin improvement against the backdrop of a volatile and challenging environment. While cost inflation continues to increase and uncertainty remains, we’re seeing the strength and resiliency of our brands driving benefits across the business.” By segment, health and wellness’s net sales decreased by 3.0%, with three percentage points of benefit from pricing offset by three percentage points of unfavorable mix and another three percentage points of higher trade spending. Household net sales increased by 6.0%, driven primarily by four percentage points from pricing benefits and a two-percentage-point increase in volume. Lifestyle net sales increased by 4.0%, driven by six percentage points of volume growth, which was partially offset by two percentage points of unfavorable price mix. International sales increased by 1.0%, driven by four percentage points of price mix and two percentage points of higher volume. |
| Outlook | For fiscal 2022, Clorox reiterated its sales guidance and revised its EPS guidance. It expects 1.0%–4.0% year-over-year sales decline due to the rising cost inflation and it now expects adjusted EPS in the range of $4.10–$4.30, compared to prior guidance of $4.30–$4.50, representing 41.0%–44.0% year over year decline. The company expects its gross margin to decline by 800 bps, primarily due to higher-than-anticipated commodity, manufacturing and logistics costs. |
| Colgate-Palmolive Company (NYSE: CL) 1Q22 | |
| Commentary | In the fourth quarter, Colgate-Palmolive reported organic sales growth of 4.0% year over year, versus 3.0% growth in the previous quarter, driven by higher pricing in nearly every region. Diluted EPS declined by 18.0% year over year. The company’s gross profit margin was down 220 bps year over year to 58.5% due to significant increases in raw material and logistics costs worldwide. By geography, North America’s organic sales were flat year over year as declines in-home care’s organic sales partially offset oral care and personal care organic sales. Specifically, Latin America’s organic sales increased by 6.5%, with Mexico, Argentina, Colombia and Brazil leading growth. Europe’s organic net sales declined by 3.0%, as organic sales declined in the Filorga duty-free business, France and Spain, despite being partially offset by organic sales growth in Germany. The Asia-Pacific region’s organic net sales grew 1.0%, where organic sales growth in Australia, the Philippines and Indonesia was partially offset by organic sales declines in China and Thailand. CEO Noel Wallace said, “Our entire cost factor has risen over the past few months, but the biggest impact has come in the area that we call fats and oils. That's palm oil, palm kernel oil, soybean oil, tallow and others. These ingredients are used in every category we compete in, and we expect a more than 60% increase across fats and oils this year.” |
| Outlook | Colgate-Palmolive raised its organic sales guidance for fiscal 2022 and now expects it in the 4.0%–6.0% range year over year, compared to prior guidance of 3.0%–5.0%. It expects net sales growth to be at the higher end of 1.0%–4.0%, including a low-single-digit negative impact from foreign exchange. The company expects a year-over-year decline in adjusted gross profit margin and mid-single-digit EPS decline. |
| Herbalife Nutrition Ltd. (NYSE: HLF) 1Q22 | |
| Commentary | Herbalife’s total sales decreased by 11.0% year over year, compared to a 6.6% decline in the previous quarter. The sales decline was due to the inflationary environment, widespread geopolitical uncertainty driven by the Russia-Ukraine war and the current Covid-19 crisis in the Asia-Pacific region and South and Central America. Adjusted EPS declined by 30.3% year over year. The gross margin was down 201 bps year over year to 77.0% due to increased supply chain costs and lower production volume at the company’s facilities. By geography, North America’s sales decreased by 9.5% year over year, EMEA’s sales decreased by 16.7% year over year, and South and Central America’s sales decreased by 13.6% year over year. Meanwhile, however, Asia Pacific’s sales increased by 1.1% year over year, led by continued strength in India. The company is taking meaningful steps to improve margins through pricing actions and cost controls. The company implemented price increases in most markets in the first quarter and will take incremental pricing actions during the second quarter in response to the dramatic increase in input and freight costs. |
| Outlook | For the second quarter of 2022, Herbalife expects sales growth to decline by 11.5%–17.5% year over year, including an approximately 270 bps currency headwind versus the prior year. It expects adjusted EPS to be in the range of $0.60–$0.80, representing a decline of 47.4%–60.5% year over year. For fiscal 2022, the company revised its net sales and EPS guidance and now expects sales to be in the range of (4.0)%–(10.0)% year over year, compared to prior guidance of flat-to-6.0% growth. However, the company expects net sales will be flat in the second half of 2022 and will return to year-over-year net sales growth in the fourth quarter. Herbalife expects adjusted EPS in the range of $3.50–$4.00, compared to prior guidance of $4.30–$4.80, representing a decline of 16.5%–26.9% year over year. For fiscal 2022, the company expects to spend $175.0–225.0 million in capital expenditure. |
| CVS Health (NYSE: CVS) 1Q22 | |
| Commentary | CVS Health reported revenue growth of 11.2% year over year, versus 10.1% growth in the previous quarter. Its adjusted EPS increased by 8.8% year over year. Adjusted operating income increased by 6.6% year over year due to increased prescription and front store sales volume, including the sale of Covid-19 over-the-counter (OTC) test kits, Covid-19 vaccinations in the retail segment and growth in specialty pharmacy in the pharmacy services segment. The company administered over six million Covid-19 tests and more than eight million Covid-19 vaccines nationwide during the quarter. By segment, health care benefits’ revenue increased by 12.8% year over year, driven by growth across all product lines. Its pharmacy segment’s revenues increased by 8.6% year over year, which the company attributed to increased pharmacy claims volume, growth in specialty pharmacy and brand inflation. Its retail business witnessed a 9.2% year-over-year sales increase, driven by increased prescription and front store sales volume. In the first quarter, the company launched a new, omnichannel fulfillment option where consumers can purchase health and wellness products online with an option for free same-day pickup. The option will expand to 6,000 CVS community health destinations later this year. In its specialty pharmacy, CVS Health is now using Microsoft text analytics and robotics to automate the 40.0% of prescriptions that are still paper or fax-based, making it easier and faster for the company to fill the patient’s prescription. |
| Outlook | CVS Health raised its full-year 2022 guidance for adjusted EPS and now expects it in the range of $8.20–$8.40, compared to earlier guidance of $8.10–$8.30, representing growth of 3.5%–6.0% year over year. The company also reiterated its full-year 2022 cash flow from operations guidance range of $12.0–13.0 billion. In 2022, the company anticipates capital expenditures in the range of $2.8–3.0 billion, as it plans to invest in technology and digital enhancements to improve the consumer experience and its community locations. |
| Sprouts Farmers Market, Inc. (NasdaqGS: SFM) 1Q22 | |
| Commentary | Total sales increased by 4.0% year over year, versus 7.0% decline in the previous quarter. The company’s comparable-store sales increased by 1.6% year over year, supported by positive comp transactions, while diluted EPS increased by 12.9% year over year. Due to inflationary costs, its gross margin was flat year over year at 37.3%. E-commerce sales were 11.5% of total sales, which were slightly elevated during the early part of the quarter due to the Omicron surge. The company continues to see its customer engagement grow from a digital standpoint with increases in account sign-ups, active e-mail users and tech subscriptions. In the first quarter, the company continued to experience strength in its deli business as consumers searched for healthy and easy meal options. It also experienced strength in areas with the greatest selection of products such as grocery, dairy and vitamins. CFO Lawrence Molloy stated, “Inflation is not slowing, and customers continue to put a few less items in their basket this year than last. We can speculate a variety of reasons as to why the fewer units. Rising gas and utility prices, of late of precious discretionary dollars to more experiential offerings such as travel or restaurants, et cetera.” During the quarter, the company opened six new stores, closed one store and spent $22 million in capital expenditures. |
| Outlook | For fiscal 2022, the company expects sales growth, comparable store sales growth and EPS at the lower end of the previously provided guidance of sales growth between 4.0% and 6.0% year over year, comp store sales growth of 0.0%–2.0% year over year and adjusted EPS in the $2.14–$2.24 range, representing 1.9%–6.7% year-over-year growth. The company will continue its plan to open 15–20 new stores in 2022 and invest $150–170 million in capital expenditures, including the potential relocation of one of its distribution centers to a larger facility. For the second quarter of fiscal 2022 (2Q22), the company expects flat comp store sales year-over-year growth and EPS between $0.49 and $0.53, representing growth of (5.8)%–1.9% year over year. |
| Floor & Decor Holdings, Inc. (NYSE: FND) 1Q22 | |
| Commentary | Floor & Decor Holdings reported 31.5% sales growth year over year, versus 8.3% growth in the prior quarter. Comp sales increased by 14.3% year over year, driven by a 16.7% increase in average ticket total. Meanwhile, adjusted EPS declined by 1.5% year over year. The company’s first-quarter gross margin decreased by 340 bps year over year to 39.7% due to higher supply chain and freight costs. The company’s e-commerce sales increased by 46.0% year over year and accounted for 17.7% of total sales. First-quarter demand for hard surface flooring remained strong—particularly among professionals—with broad-based strength across most merchandise categories and all store classes. Management stated that West Coast ports remain its most significant challenge. However, the company will continue to divert through other ports and increase its dray capacity to minimize this impact. The company opened six new warehouse stores and three design studios during the first quarter, ending the quarter with 166 warehouse stores and five design studios. |
| Outlook | For fiscal 2022, the company reaffirmed its financial guidance and expects sales to be $4.3–4.4 billion—representing 26.5%–29.4% year-over-year growth—and comp sales growth to be 10.5%–13.0% year over year. It expects diluted EPS to be $2.75–$3.00, representing growth of 12.7%–23.0% year over year. Floor & Decor Holdings will continue its plan to open 32 new warehouse-format stores and four small design studios in 2022. The company expects capital expenditure to be $550–590 million in 2022. |
| Wayfair (NYSE: W) 1Q22 | |
| Commentary | Wayfair reported a 13.9% decline in revenues year over year, versus an 11.4% decline in the previous quarter, due to new macroeconomic and geopolitical headwinds which exacerbated inflationary pressures and subdued some customer sentiment, particularly in Europe. Adjusted EPS was $(1.96) for the quarter. The company’s gross margin was down 200 bps to 26.9% year over year due to higher transportation and energy costs, as well as labor expenses. By geography, US net revenue declined by 9.9% year over year, while international net revenue declined by 31.4%. During the quarter, the total number of orders delivered was down 29.0% year over year, and active customers declined by 23.4% year over year. However, net revenue per active customer increased by 12.8% year over year. Wayfair CEO Niraj Shah said, “Consumer spending is still climbing for retail overall. However, even with a relatively healthy individual balance sheet, shoppers are nonetheless diverting a larger share of their wallets to non-discretionary categories, and reprioritizing experiences like travel. Reflecting these trends within our business we’re seeing more strength from luxury and professional customers vis-à-vis mass shoppers.” |
| Outlook | Wayfair did not provide financial guidance. However, for the second quarter of fiscal 2022, the company expects its gross margin to be 27.0%–28.0% and capital expenditure to be $130–140 million. The company also expects year-over-year revenue growth to progressively accelerate throughout 2022, aided by improved product availability, speed of delivery and customer value, as well as normalized year-ago comparisons. |