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 on those that reported in the week ended August 23. 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., Walmart) and term their quarters differently (e.g., Kohl’s).
From May, sales declines at US brands and retailers began to ease as stores reopened and coronavirus lockdowns were lifted. In June, US retail sales saw an extraordinary 10.1% year-over-year jump, fueled by double-digit growth in several sectors. In July, US retail sales maintained strong growth momentum, with
strength in multiple sectors driving total sales growth to 10.0%, amid still difficult circumstances—as many states paused or rolled back reopening plans in the third and fourth weeks of the month due to a spike in coronavirus cases.
We assess the recent performance of selected retailers and brand owners below.
Apparel Specialty Retail
|
|
L Brands (NYSE: LB) 2Q20 |
| Commentary |
Comps grew 33% at reopened stores. Bath & Body Works (BBW) comps surged 87%. Soap and hand sanitizer historically account for 14–15% of BBW business, which increased to 25% of sales in 1Q and increased even higher in 2Q. While BBW traffic was down in malls, this was offset by higher traffic in off-mall locations, higher conversion rates in the 30% range and a larger spend per customer.
Victoria’s Secret comps were down 10% during the period that stores were open. Management reported that the 250 planned store closures at Victoria’s Secret are largely complete: The company expects to recapture 30–40% of sales from closed stores, with approximately 5% going to its digital business and the remainder to nearby stores.
L Brands took steps to create standalone companies for Victoria’s Secret and BBW by reducing its home-office headcount by 15% and hiring advisors. Management will await holiday results to determine to a business valuation. Going forward, the company plans to be more conservative on its inventory levels and keep an eye on consumer demand. The company did not report any weakness for BTS merchandise sales. |
| Outlook |
L Brands did not provide 3Q or full-year guidance. For the holiday season, it expects store capacity to be at approximately 30% of normal levels due to social distancing. The company is adding mobile point-of-sale checkout that allows customers and associates to spread out (since not all cash registers can be used under social-distancing guidelines).
Management noted that at BBW, 50–60% of its customers are expected to purchase a gift during the holidays (30–40% during non-holiday time), and the company will continue to have a variety of gifting options available for consumers. Management said that online fulfillment has been experiencing “holiday-like” volumes since the start of the pandemic, and L Brands has ramped up fulfillment-center capacity and is further increasing capacity for the second half of the year in preparation for increased volumes. |
|
|
Ross Stores (NYSE: ROST) 2Q21 |
| Commentary |
Comps were down 12% for reopened stores. On average, stores were open for about 75% of the quarter, although operating on shorter hours compared to the prior year. By the end of May, all distribution centers had been reopened.
Management reported that sales during the quarter were significantly impacted by Covid-19, particularly in Arizona, California, Florida and Texas, which represent about 50% of its store base. CEO Barbara Rentler said, “During the initial reopenings, overall sales were ahead of our conservative plans as we benefited from pent-up demand and aggressive markdowns to clear aged inventory. In the weeks thereafter, trends were negatively impacted from depleted store-inventory levels, while we were ramping up our buying and distribution capabilities.”
Management said that post-Covid, the consumer is increasingly shopping for home and casual apparel categories including activewear and athletic wear, and the company will continue to focus on these areas. “The consumer during the quarter was very much more focused on home as opposed to apparel,” CFO Travis Marquette said. Rentler noted that home becomes a more significant category in the holiday quarter.
For BTS, the company said it is planning its assortments conservatively. |
| Outlook |
The company did not provide sales or earnings guidance. Management reported that it expects to add about 39 locations this fall for a total of 66 new stores for the full year. The company did not announce its holiday plans and hours, as it is still working through its plans. |
|
|
The TJX Companies (NYSE: TJX) 2Q21 |
| Commentary |
Comps for open-only stores were down 3%. Throughout the quarter, the company saw strength in several categories, particularly HomeGoods, which delivered a double-digit open-only comp growth. Some of the non-trending, weaker categories were apparel, traditional casual and career-related apparel.
CEO Ernie Herrman said, “Following the wave of strong initial demand, traffic and sales moderated as we moved through the second quarter and into the third quarter. We believe that this was due to a number of Covid-related factors, including the impact on consumer behavior and demand and lighter store inventories than we planned. As we reopened, we weren’t able to optimize the inventory flow back to our stores like we would in a normal environment.” Some logistical delays with merchandise arriving to distribution centers occurred as vendors and transportation providers were ramping businesses back up. |
| Outlook |
For 3Q, TJX expects overall open-only comp store sales to decrease by 10–20%, in line with the sales trends that the company has been seeing since the middle of July. Management said that its expectations reflect the uncertainty over the pandemic, consumer behavior, demand and store traffic, along with an anticipated slower BTS shopping season.
Management commented that the company is monitoring consumer spending behavior closely for holiday and is prepared to quickly adjust inventory levels from warehouses to the stores for an early or late holiday season according to spending cues. |
Beauty Brands and Retailers
|
|
Estée Lauder (NYSE: EL) 4Q20 |
| Commentary |
Total sales declined by 31%. By category, skin care was the standout, growing 1% in the quarter and contributing 52% of total sales in fiscal year 2020, up from 44% in the prior year. Revenues for makeup, the second-largest category, were down 62% in the quarter. Management said that the company is innovating in this category and sees makeup “booming again” and consumer sentiment on makeup returning. Sales in fragrance declined by 57% and hair care was down by 35% in 4Q.
By geography, 4Q sales in Asia Pacific rose 16%, while sales fell 39% in the Europe, the Middle East and Africa region (EMEA) and declined by 54% in the Americas. The company’s global travel retail business declined by less than 30%, supported by strong local tourism within China. The company is implementing sustainable office practices in Mainland China and is exploring green energy solutions.
Management reported that its online business delivered nearly triple-digit organic sales growth. Online sales, including through retailers that the company supplies, represented more than 40% of total sales in 4Q—brand sites grew by nearly 90% globally. The company highlighted investments in its digital business, including offering video in a live-chat capability and deploying shoppable livestreaming globally. For example, Clinique’s livestreaming series led consumers to return more frequently, spend four times longer on site and convert at higher levels. |
| Outlook |
For 1Q, the company expects sales to decline by 12–13%. Estée Lauder announced a Post-Covid Business Acceleration Program, which will begin in 1Q21. This is a two-year initiative that includes reducing the company’s retail footprint, primarily in EMEA and North America, and increasing digital investments. As a part of the program:
• The company expects to close 10–15% of its freestanding stores, primarily in Europe and North America and to close its less productive department-store counters.
• The company estimates a net reduction of 1,500–2,000 employee positions globally.
• Estée Lauder will invest in digital and omnichannel capabilities to support continued market-share improvement and business acceleration.
• In the light of the ongoing pandemic, the company will “implement increased confident beauty practices at retail and adopt new ways of working.” |
Department Stores
|
|
Kohl’s (NYSE: KSS) 2Q21 |
| Commentary |
Total sales declined by 23%, while digital sales increased by 58% and represented 41% of total sales in the quarter, up from 20% one year earlier. Stores fulfilled nearly 50% of digital sales. Store pickup accounted for 15% of digital demand, with the company’s Drive Up service accounting for nearly half of it.
Kohl’s saw strong demand in the home, active and children categories. Home-goods sales grew by double digits overall and surged 90% digitally. The company saw softness in apparel (including dress attire). Management reported that its BTS season sales have been impacted by the pandemic but noted that the BTS assortment sells year-round as it comprises core basics, including activewear and denim. |
| Outlook |
The company expects Covid-19 to continue to impact the business and is planning conservatively. For the holiday season, Kohl’s expects consumers to shop earlier, starting in October, leveraging the department store’s digital and omnichannel capabilities. The company is emphasizing active, “cozy and comfort,” home and toys as the holiday assortment.
The company remains focused on its active business through its brand partners and expansion of its Champion brand; it is dedicating more space to active and is introducing new casual brands, such as Lands’ End and TOMS Shoes. |
Luxury
|
|
Tapestry (NYSE: TPR) 4Q20 |
| Commentary |
Total sales declined by 52% on a constant-currency basis, but digital sales grew at a triple-digit rate. Interim CFO Andrea Shaw Resnick said, “We achieved sequential improvement throughout the quarter, supported by phased store reopenings in key regions, notably North America, Europe and Japan, while we drove a return to positive growth in Mainland China in May. June was the best performing month of Q4, and we exited the quarter with revenue down approximately 30%. Importantly, with the vast majority of stores opened as we entered the new fiscal year, we drove further material progress in July.” |
| Outlook |
Tapestry expects fiscal 2021 revenues to be roughly in line with fiscal 2020 revenues; this includes pressure on the top line in the first half and the expectation of a sales inflection in the second half, assuming a continuation of a slow and steady recovery from the pandemic. |
Food, Drug and Mass Retailers: Mass Merchandisers
|
|
Target (NYSE: TGT) 2Q20 |
| Commentary |
Comps grew by 24.3%, the strongest ever reported by the company. Store-originated comps grew 10.9%, while digital comps surged 195%, accounting for 13.4 percentage points of Target’s comp growth. Stores drove more than 90% of Target’s second-quarter sales growth by enabling over 75% of the company’s digital sales. Same-day services (Order Pick Up, Drive Up and Shipt) grew 273% and accounted for approximately six percentage points of total company comp growth.
Target saw the most dramatic comp acceleration in apparel, which moved from a 20% decline in the first quarter to double-digit growth in the second quarter. Hardlines generated the strongest comp overall at more than 40%. This was the result of an even stronger increase in electronics of more than 70%, as shoppers focused on office equipment, home electronics and gaming.
The company will feature its BTS assortment for an extended period this year, moving its in-store shopping events outside into parking lots and highlighting contactless options such as Drive Up. The company will give away “boo bags” to its Drive Up guests in October, featuring surprises along with tips and suggestions for celebrating the season. This fall, Target will roll out the third and final phase of its Good & Gather assortment, adding more than 600 items to bring the total number of items to nearly 2,000. |
| Outlook |
The company withdrew its guidance, given the unusually wide range of potential outcomes, in light of the highly fluid and uncertain outlook for consumer shopping patterns and government policies related to Covid-19. For the holiday season, Target will expand the range of products available via same-day services—the company plans to include more gifts and essentials. Furthermore, the company will offer grocery items via Order Pick Up and Drive Up at more than 1,500 Target stores this fall. |
|
|
Walmart (NYSE: WMT) 2Q21 |
| Commentary |
Total sales grew by 7.5% on a constant-currency basis. In the Walmart US segment (which excludes Sam’s Club), comps increased 9.3%, led by strength in general merchandise and food. E-commerce sales at the Walmart US segment grew 97%, contributing nearly two-thirds of the segment’s comp growth.
Sam’s Club saw comp growth of 17.2%, ex fuel and tobacco, with positive contributions from both increased transactions and average ticket. Sam’s Club’s e-commerce sales grew by 39%.
Walmart saw significant increases in repeat rates and weekly active digital customers. On BTS, the company noted that items such as laptops, tablets and home-office furniture are performing well, while demand for basic school supplies, backpacks and apparel is soft.
Walmart expanded pickup and delivery services within the US, including Express Delivery that delivers customers’ orders within two hours. The company has also expanded internationally: It launched same-day delivery from 70% of Sam’s Clubs in Mexico and launched Flipkart Wholesale, a B2B solution, in India. |
| Outlook |
The company did not provide financial guidance. However, management noted that the currency headwinds remained quite strong, and if this continues, it could negatively impact 3Q revenues by about $1.1 billion. |
Home and Home-Improvement Retailers
|
|
Home Depot (NYSE: HD) 2Q20 |
| Commentary |
Total comps grew by 23.4%, while US comps rose 25%, driven by the broad-based strength across stores and geographies in both professional and DIY segments. The comparable average ticket grew 10.1%, led by an increase in basket size and customers trading up to new and innovative items. Comparable transactions grew by 12.3%, driven by strong online and in-store transactions.
Home Depot stated that sales through its digital channel grew by approximately 100%, with customers choosing to pick up their online orders at a store over 60% of the time. The retailer specified that big-ticket categories, such as appliances, riding lawnmowers and patio furniture, recorded strong performances, which was partly offset by weaker performances in certain indoor installation-heavy categories, such as special-order kitchens and countertops. |
| Outlook |
CEO Craig Menear said, “We are focused on continuing the momentum of our strategic investments to enhance the interconnected shopping experience and position ourselves for continued share capture over the long term.”
CFO Richard McPhail said, “We are committed to completing our strategic investments. However, given the priority around safety and the complexities of the operating environment we find ourselves in, we are deferring certain in-store investments and now expect some of the projects we initially earmarked for fiscal 2020 to be completed in fiscal 2021.” |
|
|
Lowe’s (NYSE: LOW) 2Q20 |
| Commentary |
Comps grew by 34.2%, driven by transaction growth of 22.6% and ticket growth of 11.6%, with strong repeat orders from new and existing customers. US comps grew by 35.1%, driven by strong project demand from both DIY and professional customers, with DIY comps outpacing Pro comps. Management noted that there was a broad-based growth across channels, product categories and geographies and a significant rise in total new Pro, DIY and millennial customers.
E-commerce sales grew by 135%, driving online penetration to 8% of sales. |
| Outlook |
In the second half of fiscal 2020, Lowe’s will reinvest in the business to improve its product offering, simplify its store environment and elevate its service offering. The company clarified that these investments would include store resets to “improve product adjacencies, bay productivity and sales per square feet.”
Furthermore, Lowe’s is enhancing its supply-chain infrastructure and plans to open 50 cross-dock delivery terminals, seven bulk distribution centers and four e-commerce fulfillment centers over the next 18 months. |
Looking Forward
The e-commerce channel is helping retailers across sectors to increasingly offset the lost sales from brick-and-mortar store closures and reduce in-store inventory. However, the off-pricers do not have substantial—or in some cases, any—e-commerce business to fall back on, so will need to work harder to drive shoppers back into stores.
In discretionary sectors, we are seeing strength in home and home-improvement retail: Kohl’s, Ross and TJX each called out home categories as outperformers. However, each also noted ongoing weak demand for apparel. Target appears to be bucking the trend in apparel, given its category turnaround in the second quarter.
Most retailers are anticipating a slower BTS shopping season and are planning to feature a BTS assortment for an extended period this year. With regard to
BTS 2020 business, home goods and electronics are performing well, but demand for apparel and basic school supplies remains soft.
The holiday season is likely to start as early as October, with the e-commerce channel driving a significantly greater share of sales than last year. For the holiday season, retailers should be prepared to quickly adjust inventory levels at stores.
