albert Chan
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 30. 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., Best Buy) and term their quarters differently (e.g., Coty).
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
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Burlington Stores (NYSE: BURL) 2Q20 |
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| Commentary |
Total sales declined by 39%, while sales in reopened stores decreased by 14%. Burlington saw a significant shift in spending to home and casual wear. These are underdeveloped categories for Burlington, and management sees these as growth opportunities. CEO Michael Sullivan said, “Following the reopening of our stores, we experienced an exceptionally strong sales trend, driven by pent-up demand and by our own great clearance values. This strong sales trend continued into the second half of June, but then fell off dramatically as we struggled to replenish the depleted inventory levels in our stores. For inventory flow, we prioritized the stores that we opened in May. That was just over half the chain. These stores are now at approximately the inventory level that we want. Their sales levels are trending down approximately 20% but are on an improving trajectory.” Management reported that staffing shortages in distribution centers (DCs) also contributed challenges. These issues are subsiding but have not completely gone away—and are a risk not only to Burlington but across the retail industry, as retailers start to ramp up for holiday. The company said that this could lead to an increase in supply chain costs across the industry this year. During the quarter, Burlington opened three new stores, bringing its total store count to 739 stores. |
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Outlook |
The company did not provide financial guidance but said that it is moving prudently on the major elements of its Burlington 2.0 off-price strategy, which is focused on long-term success beyond the pandemic and includes store expansion. In the third quarter, the company expects to open 37 new stores, with seven expected closings or relocations. In fiscal 2020, Burlington expects to open 62 new stores and close or relocate 26 stores. This would translate to 36 net new stores in the full year. |
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Dick’s Sporting Goods (NYSE: DKS) 2Q20 |
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Commentary |
Comps grew by 20.7%, driven by a 17.9% increase in average ticket and 2.8% growth in transactions. The company saw growth across each of its three primary categories: apparel, footwear and hardlines. E-commerce sales surged 194%, with over 75% of online orders fulfilled by stores, which served as localized distribution points. By the end of June, the company had reopened 100% of its stores to the public. CEO Edward Stack said, “The favorable shifts in consumer demand that drove our strong comps during Q2 have continued into Q3, partially offset by softness in the key BTS categories. With the significant part of BTS already behind us, through the first three weeks of Q3, our consolidated comp sales have increased by 11%, with continued margin rate expansion.” The company’s private brands, such as CALIA and DSG, remained a key source of its strength and differentiation, outperforming the company’s average comparable sales growth by about 500 basis points in the second quarter. |
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Outlook |
The company did not provide financial guidance for fiscal 2020, owing to the uncertainty related to the Covid-19 pandemic and economic stimulus as well as the potential impact of consumer confidence and employment on its business. Management said that the company is extremely pleased with its 3Q sales trend and remained enthusiastic about future prospects. |
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The Gap Inc (NYSE: GPS) 2Q20 |
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Commentary |
Total comps were up 13%, primarily led by 95% growth in online sales. By brand, Old Navy and Athleta continue to outperform. During the quarter, the company acquired 3.5 million new customers through its online channel, representing over 165% growth year over year. The company activated curbside pickup and BOPIS (buy online, pick up in store) across 1,500 stores. As of August 1, 2020, Gap reopened about 90% of its stores, with inventory down about 4%. The company said that its inventory levels are more closely aligned with customer demand. |
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Outlook |
The company plans to extend its loyalty program in September, deepening its customer relationship and inviting more loyalists to stick to its brands. In fall, the company is adding two new online payment options: Afterpay and PayPal. Gap expects the BTS season to extend over a longer period. |
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Urban Outfitters (NasdaqGS: URBN) 2Q20 |
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Commentary |
Total comparable sales decreased by 13%. By brand, comps increased by 11% at Free People and decreased by 8% at Urban Outfitters and decreased by 25% at Anthropologie. Total new digital customers across all brands jumped by 76% year over year. The company’s athletic line FP Movement saw its customer base grow by 175%. This fall, the company plans to open the first FP Movement standalone location in Los Angeles. Management said that the home category produced very strong regular-price comps throughout the second quarter. The company’s Anthropologie brand was impacted by the pandemic, as it is known for offering more structured apparel geared for work and events. As the quarter progressed, the brand’s apparel team was able to adjust to more casual and less structured looks, resulting in lesser need for markdowns and driving notable improvement in sales. The company announced that it is building another large omnichannel distribution facility in Kansas that will support its growing digital business in North America. For the BTS shopping season, the company said that it is entering the fall with strong momentum. |
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Outlook |
For 3Q, the company projects total sales growth to be mid-single-digit negative, with the Retail and Wholesale segments showing improvement from 2Q. For the holiday season, CEO Richard Hayne said, “We are planning for an extended holiday shopping period, with sales beginning earlier, reaching a plateau sooner but missing the peaks characteristic of prior years as consumers seek to avoid crowds. If our Covid-19 prediction is correct, we believe holiday sales could be positive but still heavily promotional. We expect continued strength in the digital business and have taken extra measures to ensure we have the capability to scale with customer demand during the holiday period. These include adding staff in our existing fulfillment centers earlier, installing additional equipment in those centers to boost efficiency, using a newly distribution facility to ship faster on items and staffing stores to allow for more pack-and-ship processing.” |
Beauty Brands and Retailers
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Coty (NYSE: COTY) 4Q20 |
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Commentary |
Revenues declined by 60%, with the Prestige segment plunging 73%, while the mass segment decreased by 48% as mass retailers remained partially open. The company said that Coty’s current category mix is skewed toward color cosmetics, fragrance and professional beauty, which were the categories most affected by Covid-19. However, the fourth quarter showed improvement, with strong momentum and market share gains in e-commerce. Within the e-commerce channel, Coty saw a good performance for its Covergirl Clean Fresh and Sally Hansen “Good. Kind. Pure” brands. The company also witnessed an improving market share in color cosmetics in key markets in the US and the UK. CFO Pierre-André Terisse said, “April was the lowest point, but every month since then has showed progress across the portfolio in both mass and luxury as well as for Wella. In particular, July and our latest expectation for the month of August showed significant progress, and sales stand at approximately 2.5x April levels, reflecting the reopening of number of stores, albeit with lower traffic than usual.” For August, Terisse expects sales declines of about 20%. In June, Coty signed a deal to sell 60% stake in Wella, its Professional Beauty division plus Retail Hair to investment banking firm KKR. The deal is expected to be completed by the end of 2020. Wella’s sales declined by 41% due to the closure of most salons during the quarter. |
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Outlook |
The company did not provide a financial outlook. However, management said that the company plans to build platforms to address underexposure in skin care, Northern Asia and e-commerce, while at the same time create space for additional brand-building investment. By the end of the year, Coty plans to reduce fixed costs by $600 million. |
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Ulta Beauty (NasdaqGS: ULTA) 2Q20 |
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Commentary |
Total transactions declined by 36.2% as health and safety concerns led to fewer physical shopping trips; however, average ticket increased by 14.9%. As stores reopened, sales trends have improved in the skincare, fragrance and bath categories, delivering double-digit comp growth in July. The makeup category continues to be challenged, although some subcategories of makeup performed better than others, including lashes, brow and eye. Sales from e-commerce increased by more than 200%. Curbside pickup and BOPIS totaled about 20% of total e-commerce orders. Since the beginning of the pandemic, Ulta Beauty reported it has seen more than 2 million online transactions from non-members, more than 4x the number over the same period a year ago. The company launched a guest-service chatbot on ulta.com to help enhance digital experience and is investing in its fulfillment capacity to support a larger e-commerce business. Ulta Beauty is expanding its ship-from-store program to 100 stores to increase shipping capacity. Guest engagement with the company’s virtual try-on GlamLab tool increased by 150% quarter over quarter. The company intends to expand virtual try-on with sampling capability. This fall, Ulta Beauty will launch Conscious Beauty, an initiative to certify brands under five pillars: cruelty free, clean ingredients, sustainable packaging, vegan and positive impact. The company pledges to ensure that by 2025, 50% of all packaging sold will be made from recycled or bio-sourced materials or will be recyclable or refillable. |
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Outlook |
The company did not provide financial guidance but said it will take a cautious approach to the second half and expects comps to be down in the low-double-digit to mid-teens range, reflecting the following factors:
In 2020, the company expects to open approximately 30 new stores and relocate five stores. For 2021, the company is still finalizing its new store opening plans but expects the total to be at least that of 2020. |
Department Stores
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Nordstrom (NYSE: JWN) 2Q20 |
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Commentary |
The company’s full-price sales declined by 58%, while off-price sales decreased by 43%. Top-performing categories included home, kidswear, accessories, beauty and active in both full-price and off-price businesses. Owing to Covid-19, the department store shifted its Anniversary Sale event from July to August, which negatively impacted its digital sales in the second quarter—digital sales declined by 5%. Excluding this shift, digital sales increased by about 20% in the second quarter. Through its digital platforms, Nordstrom saw over 50% growth in new customers. The company reported increased customer engagement of curbside pickup and returns, which represented one-quarter of order pickup volume—total order pickup is approaching 15% of its digital sales. For its Anniversary Sale, the company is taking actions to meet evolving customers preferences. CEO Erik Nordstrom said, “We are expanding our assortment to reflect growing preference for categories focused on casualization, comfort, wellness and home. For the first time, customers could preview items through a digital catalog and build a wish list to enable them to check out faster when it was time to shop. Our customers created nearly 20 million wish lists, which was not only a great way for them to engage early, but also allowed us to adjust in real time to high-demand items.” With regard to BTS, President Peter Nordstrom said, “Back-to-school is not exactly what it used to be… but what makes it a durable business is that kids keep growing regardless of the pandemic. So, we've had good kids results—and it's clear that if we have the relevant product for kids, there is upside potential for us in kids, and that's another place where we've gotten some clear signals. We have a sizable kids business, particularly we have a pretty big kids’ shoes business, but I don't think the physical school part of it is much of a limiting factor. It's our ability to make sure we're in relevant product as those kids grow and they need new clothes.” |
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Outlook |
The company did not provide financial guidance. However, based on current trends and inventory plans, Nordstrom is expecting sequential and gradual improvement in sales, earnings and cash flow in the back half of the year. The company is planning for an early holiday start this year. Erik Nordstrom said, “For holiday, we plan to continue to build on last year's success, with an emphasis on expanding our assortment of giftable products, with greater breadth at lower prices and across categories. We are focused on making it festive and easy for customers to shop by emphasizing our convenience services and experiences in stores and online. Using an approach similar to what has been successful in Anniversary, we will continue to leverage data to inform our assortment and categories that are resonating with our customers.” |
Electronics Retail
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Best Buy (NYSE: BBY) 2Q21 |
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Commentary |
Best Buy's enterprise comp growth was 5.8% despite its stores being open by appointment only for the first six weeks of 2Q20, driven by strong performance in computing, appliances and tablets categories. The growth was partly offset by declines in mobile phones and digital imaging. After the company reopened its stores for shopping, trends for most categories improved through the quarter, particularly for large appliances and home theater that benefit more from experiential shopping. Digital revenue in the US grew by 242%, owing to higher conversion rates and increased traffic. In the US, online revenue as a percentage of total revenues rose to approximately 53.1% versus 16.1% in 2Q19. There was also strong digital demand for some of the company's new categories, such as digital health and fitness, at-home fitness equipment, sustainable living, outdoor activities and camping equipment. |
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Outlook |
Best Buy CFO Matt Bilunas said, “We are planning for Q3 sales to be higher compared to last year but likely will not continue at the current quarter-to-date level of approximately 20% growth. Also, as our stores are fully reopened, we are planning for Q3 SG&A expense to be more in line with last year’s third quarter.” Bilunas added, “Overall, as we plan for the back half of the year, we continue to weigh many factors, including potential future government stimulus actions, the current shift in personal consumption expenditures from areas like travel and dining out, the possible depth and duration of the pandemic, the risk of higher unemployment over time and the availability of inventory to match customer demand.” |
Food, Drug and Mass Retailers: Discount Stores
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Dollar General (NYSE: DG) 2Q20 |
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Commentary |
Comps were up 18.8%, driven by a substantial increase in average transaction size. The company saw comp growth in several categories, including home products, consumables, seasonal and apparel categories, with home products witnessing the largest percentage increase. CEO Todd Vasos said, "We experienced significant growth in our non-consumable business in the month of April and through May 26. These trends continued through the end of Q2, and we're pleased to note that for the second quarter, our three non-consumable product categories in total delivered a combined comp sales percentage increase well in excess of our consumable businesses. In terms of our monthly comp cadence, sales increased by 21.5% in May, 17.9% in June and 17.2% in July." The company highlighted that between the end of the second quarter and August 25, it experienced elevated overall comp growth of about 15%. |
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Outlook |
Dollar General expects its comp sales trends to moderate in the second half of the year. For the full year 2020, the company plans to incur capital expenditure of $1.0–1.1 billion. It expects to open 1,000 new stores, remodel 1,670 stores and relocate 110 stores, representing 2,780 real estate projects in the fiscal year. By the end of 2020, the retailer also plans to roll out its Non-Consumable Initiative (NCI), which consists of a new and expanded assortment in key non-consumable categories—such as home, housewares, domestics, party and occasion—to more than 5,400 stores. |
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Ollie’s Bargain Outlet (NasdaqGM: OLLI) 2Q21 |
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Commentary |
Comps grew 43.3%, driven by growth in both average basket and transactions. During the quarter, the company opened six new stores for a total of 23 new store openings in the first half of the year. The company’s new stores continued to perform above its expectations across both new and existing markets. CEO John Swygert said, “What we saw during the quarter is with the customers' lifestyle changes, they were buying very broadly and all of the products we were selling in our stores really resonated with the consumer. So, all of our departments were moving along very, very well and comping very strongly. We sold out of our lawn and garden and summer furniture earlier this year than ever because of the demand. So those departments are not performing nearly as well, because we don't have the inventory to back the sales. From our perspective, it's actually a good thing, because the season is over, and it is lower markdowns for us to have to deal with. Other than that, the consumer is still responding to all the offers we have in our stores.” |
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Outlook |
So far in 3Q, the company has opened four new stores and plans to open 46 net new stores by the end of 2020, including one relocation and one closure. CFO Jay Stasz said, “Comps are now tracking in the high teens, and we expect slower growth as we progress through the year. There remains a great deal of uncertainty around the number of factors, including consumer demand, the impact of economic stimulus and, on the competitive front, the potential for a highly promotional environment.” |
Home & Home Improvement
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Williams-Sonoma (NYSE: WSM) 2Q20 |
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Commentary |
Williams-Sonoma saw comp growth of 10.5% and record operating profit growth of 115%, driven by strong performance in the e-commerce channel, which grew by 46% (including purchases made through omnichannel services such as curbside pickup and ship-from-store). Brand-wise, the Williams Sonoma brand was the strongest, delivering comp growth of 29.4%, while Pottery Barn and West Elm registered comp growth of 8.1% and 7%, respectively. E-commerce penetration touched a record high of about 76% of the company’s total revenues. Management said that the performances of the reopened stores were better than expected through the quarter. |
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Outlook |
The company said that the quarter-to-date sales in 3Q are strong across all brands and will continue to improve over the rest of the year. From a margin perspective, Williams-Sonoma said that shipping will be a key headwind in the second half of the year because of various surcharges announced by third-party shippers on all retailers. The company highlighted that its long-term plans include:
CEO Laura Alber said, “Longer term, we believe the behavioral changes and industry shifts that have emerged from the pandemic will persist and continue to favor our business. We are investing in the next phase of our growth and the opportunities that position us for accelerated market share gain.” |
Looking Forward
The e-commerce channel continued to help retailers across sectors to increasingly offset lost sales from brick-and-mortar store closures and reduce in-store inventory. Many retailers are looking to strengthen their digital model, including through the expansion of distribution centers and ship-from-store capabilities. However, the off-pricers do not have substantial—or in the case of Burlington, 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: Burlington Stores, Dollar General, Nordstrom and Urban Outfitters each called out home categories as outperformers. Burlington Stores, Nordstrom and Urban Outfitters reported growing preference for casual wear, while the demand for structured apparel (geared for office and events) remains weak.
Retailers’ reactions are mixed about the BTS shopping season, with many 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. According to Coresight Research estimates, BTS spending is estimated to be depressed by 7.5–9.5% year over year. We estimate that e-commerce will account for around 43% of total BTS spend in the US this year, with online dollar spending up by an estimated 35–40% year over year.
The holiday season is likely to start as early as October, providing for an extended shopping period – the e-commerce channel is expected to drive a significantly greater share of sales than last year. For the holiday season, retailers should be prepared to quickly adjust inventory levels at stores by ensuring the capability to scale with customer demand—such as by expanding distribution centers and ship-from-store capabilties.