Introduction Our weekly Earnings Insights reports look at key commentary and qualitative insights from major US retailers and brand owners on the impact of the coronavirus crisis on second-quarter 2020 performance (ending July 31 for most companies). Companies featured are those within our Coresight 100 coverage list, and in this report, we focus mostly on those that reported in the week ended August 9, except two companies (Amazon and VF Corporation) that reported their earnings prior to the current week. For most US retail companies, the quarter under review will be the second quarter of fiscal year 2020 (ending January 2021), but some of the companies covered have different year ends (e.g., Amazon) and term their quarters differently (e.g., VF Corporation). From May, sales declines at US brands and retailers began to ease as stores reopened and lockdowns were lifted. In June, US retail sales saw an extraordinary 9.2% year-over-year jump amid still difficult circumstances, fueled by double-digit growth in several sectors. However, amid concern over ongoing outbreaks, Coresight Research’s July 29 survey found that the proportion of US consumers avoiding any type of public area remains high at 84.4%. The avoidance rate has jumped by five percentage points since the beginning of July, reflecting consumers’ increasing concerns over rising coronavirus cases in several states. We assess the recent performance of selected retailers and brand owners below.  

Apparel and Footwear Brands

	VF Corporation (NYSE: VFC) 1Q21
Commentary	Total revenues declined by 48% year over year, led by store closures and lower consumer demand due to the coronavirus outbreak and related restrictions. Global digital business increased by more than 80%, led by 115% growth in the Americas region and nearly 90% growth across its four big brands. Gross margin decreased by 340 basis points to 52.9%, primarily driven by elevated promotional activity to clear excess inventory. During the quarter, all of the company’s retail stores reopened in the APAC region. In the US, “buy online, pick up in store” (BOPIS) and ship-from-store capabilities have been fully launched in the vast majority of stores. Its business in Mainland China is strong and has been recovering sharply since February, with growth of 9% in the quarter. The company is applying many of its consumer-centric strategy learnings from China to other markets across the globe. VF continued to explore the divestiture of its Occupational Workwear business.
Outlook	For fiscal year 2021, the company expects more than 40% growth in its digital business and expects its digital penetration to be over 25% of total revenues. The company will continue to focus on key strategic choices around the transformation to a retail-centric, digitally led enterprise: By August end, its North Face brand will launch BOPIS and ship-from-store capabilities in EMEA; BOPIS and ship-from-store for its Timberland brand in EMEA and the US is under planning. The company is also applying curbside functionality in both the Americas and EMEA.

 

Drugstore Retailers

	CVS Health (NYSE: CVS) 2Q20
Commentary	Total revenues increased by 3.0%, supported by the chain’s health-care operations as people pushed back elective procedures and discretionary use of their healthcare benefits during the pandemic, resulting in much lower medical costs for the company. CVS Health witnessed continued demand for MinuteClinic virtual-care visits amid the pandemic, which grew 750% in the second quarter. Revenues growth by segment: Pharmacy Services, 0.1%; Retail/LTC, 1.0%; and Health Care Benefits, 6.1%. CVS Health witnessed comp growth of 2.4%. By major goods/service line, pharmacy saw a comp growth of 4.6%, while front store’s comp declined by 4.5%. CFO Eva Boratto said that renewals for Pharmacy Services for the 2021 selling season are about 90% complete, with a strong 98% retention rate. Boratto further added that the company has won $4.3 billion in gross new business for 2021. CVS Health continues to increase its pharmacy penetration within the Aetna business, with $250 million in incremental revenue. Boratto said, “Within the Pharmacy Services and Retail/Long-Term Care segments, we saw prescription volume growth accelerate in June as members refilled 90-day prescriptions from March. In June, front-store growth started to benefit from states reopening, followed by customers stocking up on key preventative and treatment items in the Sun Belt states during July. In Health Care Benefits, medical cost utilization largely returned back to normal levels in June and July but obviously varies by geography and lines of business.”
Outlook	The company raised its full year fiscal 2020 guidance and now expects EPS of $7.14–$7.27, up from the prior forecast of $7.04–$7.17. For the full year, CVS also increased its cashflow guidance to $11.0–11.5 billion, up from the prior forecast of $10.5–11.0 billion. Management noted that the company is on track to open about 1,500 HealthHUB locations by the end of 2021 despite the disruptions caused by the pandemic. Boratto said, “We expect approximately $2 billion of Covid-19-related investments for the year, of which about 40% was incurred in 2Q. Approximately $1.5 billion of the $2 billion will impact the Health Care Benefit segment, benefiting customers and members, including premium credits and contractual requirements. About 35% was reflected in Health Care Benefit’s 2Q results. For the Retail/Long-Term Care segment, we expect approximately $400 million of investments, with $240 million reflected in 2Q. Clearly, the timing of these investments will affect the earnings cadence for the back half of the year.”

 

E-Commerce

	Amazon (NasdaqGS: AMZN) 2Q20
Commentary	Amazon’s online grocery sales tripled year over year in the quarter. The company also increased grocery delivery capacity by more than 160%. The growth rate of Prime membership accelerated both in the US and worldwide, while existing Prime member renewal rates also improved. Revenues from third-party-seller services grew faster than Amazon’s online stores revenue, with strong growth in fulfillment by both Amazon and merchant-fulfilled or merchant-fulfilled-network (MFN) seller sales. The company confirmed that this year’s Prime Day shopping event will take place in the fourth quarter (with the exception of Amazon India, which hosted Prime Day on August 6 and August 7). Amazon is investing in international businesses, including Australia, Brazil, India, the Middle East and Turkey. The company has also launched new technology products and services, including new live interactive video services for streaming and Ring Video Doorbell for improved home security.
Outlook	For the third quarter, Amazon expects net sales to be $87.0–93.0 billion, representing year-over-year growth of 24–32%. Management said that the company is focused on making more room in its fulfillment centers as it prepares to head into the peak holiday shopping season in November.

 

Home and Home-Improvement Retailers

	Wayfair (NYSE: W) 2Q20
Commentary	Wayfair became profitable for the first time since it went public in 2014, reporting a net profit of $273.9 million during the quarter, driven by the consumer shift towards buying home goods online due to the ongoing coronavirus crisis. The company’s active customer base increased by 46% year over year to 26 million at the end of the quarter. CEO Niraj Shah said, “We experienced unprecedented demand in the second quarter and saw record numbers of new and repeat customers choose Wayfair.”
Outlook	Wayfair did not provide guidance for the third quarter given the uncertain environment, particularly in the US, but it expects another profitable quarter on the back of expectations that customers will continue to invest in their homes in the second half of the year.

 

Luxury

	Capri Holdings (NYSE: CPRI) 1Q21
Commentary	Total revenues declined by 66.2% on a constant-currency basis. CEO John D. Idol said, “While our performance was significantly impacted by the Covid-19 pandemic, revenue and earnings exceeded our initial expectations—and as our stores reopened, revenue exceeded our original expectations. Similarly, our wholesale partners, e-commerce sites and reopened stores are performing above our expectations. Total revenue declined by 66%, with trends improving progressively each month.” CFO Thomas J. Edwards said, “We are experiencing more rapid recovery in China as luxury sales are benefiting from domestic demand. In the balance of Asia, as well as the Americas and EMEA, we expect the recovery to take longer. Across all geographies, we anticipate a slower recovery in tourist activity, which impacts our travel retail channel as well as many important flagship locations in major tourist destinations.” In EMEA, Capri began reopening its store fleet in May and ended the quarter with about 70% of stores open.
Outlook	For the second quarter, the company expects total revenues to decline by 40% year over year, with retail sales performing significantly better than wholesale. In the third and fourth quarters, Capri Holdings forecasts sales across regions to gradually improve as consumer confidence and the economy begin to recover. For the full year, the company expects a revenue decline of about 35%. Management expects the company to return to generating positive EPS in the second half of fiscal year 2021 as revenue trends gradually improve. Capri Holdings is optimistic on its long-term growth potential. Over the period, the company expects its revenues from the Versace and Jimmy Choo brands to more than double—to reach $2 billion and $1 billion, respectively—with a mid-teens operating margin in percentage terms for both. The company expects inventory to sequentially decline throughout fiscal year 2021 and end the year almost in line with its full-year revenue decline. Over the next two years, the company plans to close about 150 Michael Kors stores.
	Ralph Lauren (NYSE: RL) 1Q21
Commentary	The company witnessed a comp decline of 57% as stores were closed for eight to 10 weeks across many of its largest markets in the first quarter. By region, the largest declines were in North America and Europe, where stores were closed for the longest period. The company saw strong digital momentum in the quarter. Own digital comps were positive in all regions: 68% growth in Asia and 44% growth in Europe, and North America also reported positive digital comps. All of the company’s stores are open in Asia, Europe and North America. CEO Patrice Jean Louis Louvet said, “As stores reopened, we experienced significant traffic and comp declines initially, but strong growth in conversion rates and average basket size. In the weeks that followed, we saw sequential improvement in brick-and-mortar traffic and comps, although both metrics were still negative as we exited the quarter. Our Europe and North America comp declines in June were roughly half the rate we experienced in April. Asia comps improved from more than 50% declines in April to a single-digit decline in June.” The company said that home and loungewear are emerging as high-potential, underdeveloped lifestyle categories.
Outlook	Louvet said, “We continue to expect our financial results for both the second quarter and full fiscal year 2021 to be significantly adversely impacted by the pandemic and prolonged demand recovery. Though the timing and path of recovery in each market presents many uncertainties, including the potential for second waves of outbreaks across various markets, we have developed scenarios through which we plan to safely return our businesses to growth and value creation.”

   

Looking Forward

With the e-commerce channel helping retailers to increasingly offset 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. Apparel brand VF Corporation’s digital business grew by over 80% during the quarter, however, the company saw its gross margin decline by 340 basis points, due to high promotional activities to clear excess inventory. Luxury retailers are witnessing higher-than-expected conversion rates and average basket size at reopened stores. On the other hand, home-goods retailer Wayfair anticipates stable demand for the home category in the second half of the year. Metrics such as retail sales point to an uneven recovery in discretionary sectors, with strengths in furniture and home-improvement retail and ongoing weak demand for clothing and footwear, which will impact department stores as well as specialty retailers.