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 performance, in terms of revenues and comps, and the impact of the Covid-19 pandemic on second-quarter 2021 performance (ended July 31, 2021, 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 22, 2021. For most retail companies covered in this series, the quarter under review will be the second quarter of fiscal 2021 (2Q21), although some companies may have different year ends (for example, Estée Lauder).
In May 2021, US retail sales grew by 14.0% year over year and by 19.3% when compared to 2019 values. June 2021 saw year-over-year retail sales growth decelerating to a still-strong 13.0%. On a two-year basis, June’s sales were up 25.0%, the second-strongest sales growth of any month in the past year. In July 2021, retail sales growth slowed to a still-strong 9.6% year over year. On a two-year basis, July’s sales were up 21.4%, the fourth-strongest growth in sales in the past year. Slowdown in July’s growth may be partly attributed to consumer concern over the spread of the Covid-19 Delta variant, impacting spending behaviors. However, overall demand for goods continues to remain strong, even as consumer spending is shifting back to services—July saw strengthening in traffic trends despite a surge in new Covid-19 cases. Looking ahead to projected sales in August, we expect retail sales to increase by about 10% year over year.
We assess the recent performance of selected retailers and brand owners below.
Beauty Brands and Retailers
The beauty category continues to recover strongly, with Bath & Body Works and Estée Lauder posting a double-digit sales increase on a two-year basis. In the week ended August 1, 2021, L’Oréal reported positive sales growth on a two-year basis.
| Bath & Body Works (NYSE: BBWI) 2Q21 | |
| Commentary | Bath & Body Works (formerly L Brands) reported sales growth of 43.0% year over year and 14.3% on a two-year basis. Results for the quarter included both Bath & Body Works (BBW) and Victoria’s Secret. BBW’s sales increased by 36.0% year over year and 53.9% on a two-year basis, while Victoria’s Secret recorded a sales increase of 51.3% year over year but a decline of 9.6% compared to 2Q19. In the direct channel, BBW’s sales decreased by 22% year over year but increased by 128% compared to 2019, while Victoria’s Secret experienced a sales decrease of 24% year over year but an increase of 26% compared to 2019. The company’s total operating margin stood at 18% in 2Q21 versus 2% in the same quarter last year. During the quarter, the company opened a net 11 stores and its total store count reached 2,692. |
| Outlook | For the third quarter, the company expects an EPS decline of 27%–34% year over year but growth of 175%–200% on a two-year basis. |
| Estée Lauder (NYSE: EL) 4Q21 | |
| Commentary | Estée Lauder reported a 62% year-over-year increase in revenues during 4Q21 (representing about 10% growth versus the corresponding quarter in 2019). For the full year, the company’s revenues increased by 13% year over year. By category, fragrance, haircare and skincare sales increased by double digits year over year. Skincare’s growth was led by its Clinique, Dr. Jart+, Estée Lauder and La Mer brands. Growth in fragrance was driven by the Estée Lauder, Jo Malone London, Kilian Paris, Le Labo and Tom Ford Beauty brands. Haircare’s growth was fueled by Aveda, through its successful innovation Botanical Repair. Makeup remained sluggish, declining by 12.0% and seeing major sales declines in foundation and lips. By geography, sales growth remained positive year over year in all regions for the full year, led by 29% growth in Asia Pacific. In the quarter, the company reported an operating margin of 5.9%, versus (22.3)% in the same quarter last year. |
| Outlook | For 1Q22, the company expects sales growth of 17%–19% year over and adjusted EPS growth of 7%–14% year over year. For fiscal 2022, the company expects sales growth of 13%–16% year over year and adjusted EPS growth of 12%–15% year over year. |
Department Stores
| Kohl’s (NYSE: KSS) 2Q21 | |
| Commentary | Net sales increased by 31.4% year over year and were up 1.3% versus two years earlier. Management stated that year-over-year total sales growth was mainly driven by store sales, as more customers returned to in-store shopping. Digital penetration was 26% for the quarter compared to 41% in 2Q20. Stores fulfilled 40% of digital sales during the quarter. Management commented that the accessories, men’s and women’s categories saw the greatest year-over-year growth, while men’s, home and footwear were strongest on a two-year basis. Activewear remained the category with the highest customer demand, growing across both apparel and footwear—in 2Q21, activewear represented 24% of total sales, up from 20% in 2019. The company reported the following headwinds: cost inflation, wage inflation, and supply chain issues—specifically, inventory receipt delays in many areas of the business due to temporary factory closures and port congestion. Management noted that the initial customer response to Sephora at Kohl’s has been overwhelmingly positive, and it is gaining insights into how customers are shopping and what they are purchasing. |
| Outlook | Kohl’s raised its full-year guidance: the company expects net sales to increase in the low-20% range, up from prior expectations of a mid-to-high-teens increase. It expects EPS to be $5.80–$6.10, up from the prior guidance of $3.80–$4.20. This guidance represents an all-time high EPS for Kohl’s. For the back-to-school (BTS) season, management stated that the company is well positioned as kids are shopping for activewear, backpacks, denim and sneakers. For the holiday season, management noted that these categories will continue to be important as customers refresh their wardrobes. Management reported that Sephora at Kohl’s is currently in the process of opening the first of its 200 stores planned for 2021. In the next year, Kohl’s will open 400 shop-in-shop locations and aims to reach at least 850 stores by 2023. Management noted that the company is on the eve of launching several transformational partnerships that will drive sustainable growth for years to come and further establish Kohl’s as the leading destination for both active and casual lifestyles. |
| Macy’s (NYSE: M) 2Q21 | |
| Commentary | Net sales increased by 58.7% year over year and by 1.8% on a two-year basis. On a two-year basis, comparable sales on an owned basis were up 5.8%. By banner, comps for Macy’s were up 5.2%, a 16-percentage-point improvement from 1Q21, and Bloomingdale’s were up 11.5%, a nearly 19-percentage-point improvement. By category, Macy’s saw strength in dressy apparel, fine jewelry and fragrance as customers prepared for in-person social events and BTS. In the quarter, the company reported 5 million new customers, a 30% improvement versus 2019. Average customer spend was up 10% compared to 2019 and up two percentage points compared to 1Q21. In the quarter, digital penetration was 32% of the total sales, a 22-percentage-point decline from last year, but a 10-percentage-point improvement over 2Q19. |
| Outlook | For the full-year 2021, the company raised its revenues and adjusted EPS guidance. The company now expects revenues of $23.55–23.95 billion, up from prior guidance of $21.73–22.23 billion. It now expects adjusted EPS of $3.41–$3.75, up from prior guidance of $1.71–$2.12. On August 19, 2021, the company announced a partnership with Toys“R”Us which will bring 400 Toys“R”Us shop-in-shop locations to Macy’s stores nationwide in 2022. Management stated that BTS is already off to a very strong start, with high-single-digit sales growth versus 2019 in quarter-to-date 3Q21. The company expects “a very strong holiday season.” However, management highlighted headwinds including elevated levels of holiday shipping surcharges, potential unforeseen impacts of the Delta variant, supply chain constraints and a tight labor market. |
Home and Home-Improvement Retailers
| Home Depot (NYSE: HD) 2Q21 | |
| Commentary | Total sales increased by 8.1% year over year and by 33.3% on a two-year basis. EPS stood at $4.53, up from $4.02 in the same quarter last year. The company’s comparable sales increased by 4.5% year over year, with US comps of 3.4%. Digital sales growth was flat year over year but with growth of approximately 100% on a two-year basis. Some 10 of the company’s 14 merchandising departments saw positive year-over-year comp growth, led by bath, kitchen and lumber. On a two-year basis, each of the 14 merchandising departments reported strong double-digit comps. On a comparable basis, the average ticket was up 11.3% year over year, supported by inflation pass-through in categories including lumber. Management pointed to strong growth in both its pro and DIY segments, with pro slightly higher. President and COO Edward Decker commented, “During the second quarter, pro sales growth outpaced DIY growth for the second quarter in a row. On a two-year-stack basis, growth with our pro and DIY customers was consistent and strong. Growth with our larger pros continues to outpace that of our smaller pros, and they tell us that their backlogs are long and growing. In fact, the National Association of Home Builders’ Remodeling Index hit all-time highs during the second quarter. And during the quarter, we saw many of our customers turn to pros to help them with larger renovation projects. This can be seen in the strength of several of our kitchen and bath categories, like in-stock kitchens, tubs and showers and vanities, all of which posted one-year and two-year comps above the company average.” |
| Outlook | For fiscal 2021, management did not update its sales guidance, which is flat to up slightly. CFO Richard McPhail noted, “During the first two weeks of August, we’ve seen comps in the US consistent with the second quarter. Customer engagement and demand for home improvement is healthy. Housing remains strong, and we see a supportive environment for home-improvement spending as we look out over the next several years.” |
| Lowe’s (NYSE: LOW) 2Q21 | |
| Commentary | Total sales increased by 1.0% year over year and by 31.3% on a two-year basis. The company’s comparable sales declined by 1.6% year over year but increased by 32% on a two-year basis. US comparable sales decreased by 2.2% year over year but grew 32% on a two-year basis. The company’s operating income increased by 6.4% year over year and by 77% on a two-year basis. CEO Marvin Ellison commented, “During the quarter, we saw a decline in DIY demand versus last year as many families transition back to pre-Covid purchase patterns and weekend mobility after Memorial Day. But because of the agility of our Total Home strategy, we were able to capitalize on pro demand driving growth of 21% this quarter and 49% on a two-year basis.” |
| Outlook | For fiscal 2021, Lowe’s expects to generate sales of $92 billion, representing two-year comps of about 30%. CFO David Denton stated, “Month to date, August US comp sales trends are materially consistent with July’s performance levels on a two-year comparable basis. As expected, we are already seeing a several-hundred basis-point improvement in comp transaction count over the Q2 levels, partially driven by increased unit sales of DIY lumber and related attachments as DIY customers who were sitting on the sidelines reengaged after lumber prices dropped.” For fiscal 2021, the company expects the gross margin rate to be up slightly versus the prior year. Lowe’s slightly raised its outlook for operating income margin to 12.2% from 12.0%. |
Luxury Companies
US-based luxury companies are witnessing slow sales recoveries from pre-pandemic levels (slower than European firms such as LVMH), with Tapestry reporting only 1% sales growth on a two-year basis. Last week, we saw Canada Goose report a double-digit sales decline on a two-year basis, versus double-digit growth in the prior quarter on a two-year basis. Similarly, in the week ended August 8, 2021, we saw Capri Holdings report a high-single-digit sales decline on a two-year basis.
| Tapestry (NYSE: TPR) 3Q21 | |
| Commentary | Tapestry reported a 126% year-over-year revenue jump in the third quarter. On a 13-week basis, revenues increased 113% year over year and 1% versus the third quarter of 2019, returning to positive after two consecutive quarters of negative growth this fiscal year. Digital sales grew 35% year over year and over 200% on a two-year basis, while in-store revenues improved sequentially. Gross margin was 72.2%, versus 69.8% last year. Tapestry’s revenues in Greater China reached $1.1 billion, with the mainland accounting for about 60%. Management stated that the company’s sales also grew among global Chinese consumers, increasing at “a high-single-digit rate” compared to pre-pandemic levels. By banner, revenues at Coach were up 117% year over year and 2% on a two-year basis; Kate Spade’s increased by 95% year over year but were down 4% on a two-year basis; and Stuart Weitzman’s were up 146% year over year and down 4% on a two-year basis. During the quarter, the company grew its customer base by 900,000 new customers and reduced its stock-keeping unit (SKU) count by about 40%. During the year, it optimized its store fleet with 59 net closures. |
| Outlook | For fiscal 2022, the company expects revenues of approximately $6.4 billion, representing an increase of 12.3% compared to fiscal 2021, or mid-teens growth on a two-year basis. It expects EPS of $3.30–$3.40, representing growth of 11.9%–13.6%. Tapestry expects continued strong growth in digital revenues and in Greater China. The company stated that it expects stores globally to show improvement; however, revenue is expected to remain below pre-pandemic levels. Tapestry expects to maintain its current gross-margin levels with continued improvements to its average unit retail. It also expects to benefit from goods and service tax in 2Q22, which will offset anticipated negative impacts from higher freight costs. Furthermore, Tapestry anticipates higher selling, general and administrative expenses as it increases its marketing spend and plans to increase its minimum wage for US employees to $15 per hour. |
Luxury E-Commerce
| Farfetch (NYSE: FTCH) 2Q21 | |
| Commentary | Revenues increased by 43.5% year over year and by 150.1% on a two-year basis. Farfetch’s Digital Platform revenues rose by 47.1%, while its Brand Platform revenues grew 9.6%. The company’s GMV increased by 39.7% year over year to slightly over $1 billion. Management commented that overall GMV growth was driven by growth in Digital Platform GMV of 40.3%—caused by growth in orders—and an increase in average order value (AOV) from $493 to $599, offset by a 50% increase in shipping and duties cost. Farfetch noted that the increase in AOV is primarily driven by a higher full-price mix and higher average selling price as customers switched back to buying higher-priced category items. The company added that it decided not to pass on the incremental shipping cost to its customers. This led to an erosion in its gross profit margin, which stood at 44% during the quarter, versus 43.7% in the same quarter last year. The company’s adjusted EBITDA improved to $(20.6) billion from $(25.2) billion in the 2Q20. In early August 2021, Farfetch piloted its Connected Retail technology, in collaboration with selected retail partners. Management noted that the technology will enable omnichannel, personalized experiences for its customers and help drive traffic to retailers’ physical stores. |
| Outlook | For fiscal 2021, Farfetch has maintained its outlook for 35%–40% GMV growth and an adjusted EBITDA margin of 1%–2%. For the third quarter, Farfetch expects Digital Platform GMV growth of about 30%, with around 100% growth in stores. It expects Brand Platform GMV growth of about 45%, year over year. Farfetch forecasts adjusted EBITDA of about $10 million in the third quarter. The company expects its Digital Platform order contribution margin to be around 30% of its services revenues in the segment. Farfetch expects external cost pressures to continue in the form of higher shipping costs and duties, and search-engine marketing cost inflation. It also anticipates some additional costs due to regulatory changes, which will likely affect advertising and sales tax. The company has accounted for these headwinds in its expectations for the above order contribution margin target. |
Mass Merchandisers
| Target (NYSE: TGT) 2Q21 | |
| Commentary | Total revenues increased by 9.5% year over year and by 36.6% on a two-year basis. The company’s comparable sales increased by 8.9% year over year, on top of record growth of 24.3% in the same quarter last year. Digital comps grew 10% year over year, on top of 195% growth in 2Q20. Same-day services, including order pickup, drive-up and Shipt, grew nearly 55%, following growth of over 270% in 2Q20. More than 95% of Target’s customer orders were fulfilled in stores in 2Q21. By category, apparel is growing most strongly, delivering mid-teens growth year over year on top of low-double-digit growth last year. Within apparel, kids, swim and young contemporary all delivered comps in the low 20% range. In the home category, Target saw comp growth of a low single digits, year over year, following over 30% growth last year. Within home, Target saw moderating trends in categories like décor, kitchen and storage as they comped over outsize growth last year. Hardlines saw mid-single-digit comp growth, following over 40% in the last year. Growth in the hardlines category was primarily driven by strong sales in toys and sporting goods. The essentials and beauty category reported high-single-digit comp growth in the quarter. Within essentials, baby care grew by over 20% and the company witnessed mid-to-high-teens growth in both healthcare and pets. Management stated that beauty continued to gain market share on comp growth in the high single digits. The food and beverage category reported low-double-digit comp growth. The company’s operating margin stood at 9.8%, versus 10.0% in 2Q20. |
| Outlook | For the second half of 2021, Target raised its guidance and now expects comp growth in the high single digits year over year, near the high end of its prior guidance range. For the full-year 2021, the company expects its operating margin to be 8% or higher. |
| Walmart (NYSE: WMT) 2Q22 | |
| Commentary | Total revenues grew by 2.4% year over year and by 8.2% compared to the same period in 2019. The company saw broad-based sales growth across categories, including apparel, hardlines, homes and seasonal. The Walmart US segment (which excludes Sam’s Club) reported comp growth of 5.2% year over year (excluding fuel), with market share gains in the grocery category. Its e-commerce sales grew 6% year over year and 103% on a two-year basis. Sam’s Club posted comp growth of 7.7% (excluding fuel and tobacco), driven by an increase in transactions and average ticket size. Sam’s Club membership income increased by 12.2% and its member count reached an all-time high. The company continues to strengthen its omnichannel approach in Canada, China, India and Mexico. CEO Douglas McMillon commented, “In Mexico, we launched Walmart Pass, a membership model where customers get unlimited same-day delivery from stores, completed the rollout of Scan & Go to all Sam’s Clubs added new sellers to the marketplace and grew our online SKU count by 30%. Our e-commerce marketplace in India, Flipkart, introduced Flipkart Camera, our first-of-its-kind technology at scale for the Indian customer that allows users to view products in their physical environment, expanded their grocery business to over 70 cities and launched a new commerce platform called Shopsy to help reach the reseller community.” The company’s operating margin stood at 5.2%, up from 4.4% in the same quarter last year. |
| Outlook | Walmart has raised its fiscal 2022 guidance. The company now expects sales growth, excluding divestitures, to be 6%–7% year over year versus prior expectations of up low-to-mid single digits. The company expects operating income to increase by 11%–14% year over year, versus prior guidance of high-single-digit growth. |
Off-Price Retailers
| Ross Stores (NasdaqGS: ROST) 2Q21 | |
| Commentary | Total sales increased by 79.0% year over year, or by 20.7% on a two-year basis (compared to the corresponding quarter in 2019, before the pandemic). The company’s comparable store sales increased by 15% on a two-year basis, mainly driven by a larger average basket size, with traffic up slightly versus 2019. The company’s sales trends across merchandise areas and regions were broad-based: The children’s segment and the Midwest region performed the strongest. Management stated that home continues to be one of its top-performing merchandise areas, while apparel continued to accelerate from 1Q21 to 2Q21. Furthermore, the company noted that before the pandemic, there was a shift toward casual wear, followed by activewear, and now more traditional sports reclassifications have improved. In 2Q21, the company’s operating income increased by 695% year over year, or by 24% on a two-year basis. However, management noted that the company is witnessing higher distribution expenses, driven primarily by wage increases and worsening industry-wide supply chain congestion, which drove higher freight costs. |
| Outlook | For the third quarter, the company expects comparable store sales to be up by 5%–7%, versus the same period in pre-pandemic 2019. Ross forecasts an EPS of $0.61–$0.69, representing a decline of 39%–47% on a two-year basis. For its fiscal-year 2021, Ross expects its EPS to be in the range of $4.20–$4.38 (compared to $4.60 in 2019), on a comparable store sales gain of 10%–11% versus the 2019 level. For the back-to-school season, management stated that it is pleased with how the company’s younger business is performing and feels positive about its BTS sales. In the third quarter, Ross plans to open 28 stores, consisting of 18 Ross stores and 10 dd’s DISCOUNTS. Ross expects to open approximately 65 total locations this year, comprising about 45 Ross stores and 20 dd’s DISCOUNTS. In fiscal 2022, the company expects to return to its normal annual program of opening approximately 100 new stores each year. |
| The TJX Companies (NYSE: TJX) 2Q22 | |
| Commentary | Total sales increased by 81.0% year over year, or by 23.5% on a two-year basis. TJX’s overall comparable sales grew 20% on a two-year basis (versus 2Q20). Management stated that growth was supported by excellent comps in home and a very strong low-teens comp increase in apparel which continued upward this quarter. By banner, Marmaxx (US Marshalls and US T.J. Maxx) comps were 18%, HomeGoods 36%, TJX Canada 18%, and TJX International 12%. Management stated that TJX saw an increase in average basket across all divisions. Average ticket improved each month of the quarter and was up in July. Overall, customer traffic in the US, where stores were open the entire quarter with minimal occupancy restrictions, was up mid-single digits versus 2Q20. The company emphasized that the buying environment has been excellent. In terms of headwinds, management highlighted that its HomeGoods margin is disproportionately impacted by freight increases, due to its product mix—and further pressured by supply chain costs related to a new distribution center and wages. Management stated that while it expects the combination of freight, supply chain and wage costs to be higher in the back half of the year, it envisions freight and wage beginning to moderate as the company moves through the next year. During the quarter, the company increased its store count by 26, reaching a total 4,665 stores. |
| Outlook | TJX did not provide financial guidance owing to the continued uncertainty of the current environment. In the third quarter, the company plans to launch e-commerce on HomeGoods.com. Management noted that this will be another way to attract new shoppers. Management stated that the company is positive about BTS and holiday opportunities and has planned store and online merchandising plans. The company is planning marketing campaigns for television and digital media for the fall and holiday season to remain in existing customers’ minds while aiming to attract new shoppers. |
Warehouse Clubs
| BJ’s Wholesale Club (NYSE: BJ) 2Q21 | |
| Commentary | Revenues increased by 5.6% year over year with net sales, excluding membership fee income, up by the same percentage. Revenues were up by 24.8% on a two-year basis. Total comparable sales for the quarter increased by 4.0%, reflecting a two-year stacked comp of 21.2%. Digitally enabled sales grew by 4%, reflecting two-year stacked comp growth of 304%. Management stated that members continue to aggressively adopt new functionalities, such as BOPIC (buy online, pick up in club) and curbside pickup. The company’s adjusted EBITDA increased by 2% year over year to $220 million, reflecting continued margin expansion. Management stated that the company’s total membership grew 3% year over year and 14% on a two-year basis. |
| Outlook | The company did not provide financial guidance, citing uncertainty related to the pandemic and economic environment. |
Looking Forward
Off-price retailers reported another strong quarter, with Ross Stores and TJX posting double-digit comp growth on a two-year basis. While for these retailers, the home category continues to outperform, they are also seeing strong trends in apparel categories. For the BTS sales season, both Ross Stores and TJX remained optimistic. Ross Stores continued to expand its store estate. However, supply chain pressures and higher freight costs remain headwinds. For the next quarter, Ross Stores expects its comp growth to decelerate to mid-to-high single digits on a two-year basis. TJX noted that its e-commerce offerings on HomeGoods.com will launch in the next quarter and the company expects that it will attract new customers.
Major department stores are seeing solid recoveries from the crisis and they remain optimistic about the rest of 2021. Both Kohl’s and Macy’s have raised their full-year sales and EPS guidance: the former’s new EPS guidance represents its highest EPS ever. Both companies expect a strong BTS season this year and are well-positioned in terms of inventory. These department stores are seeing strong trends in various accessories, apparel and footwear categories, such as activewear, denim, dresses, fine jewelry and sneakers. They also expect a strong holiday season, but see substantial headwinds going forward, including elevated levels of holiday shipping surcharges, potential unforeseen impacts of the Covid-19 Delta variant, supply chain constraints, and a tight labor market.
Beauty retailers and brand owners continue to recover strongly. Within the beauty category, bath, fragrance, haircare and skincare are trending, while demand for makeup remains weak. For the next quarter, Estée Lauder expects sales growth of 17%–19% year over year and adjusted EPS growth of 7%–14%. Bath & Body Works forecasts an EPS decline of 27%–34% in the next quarter.
In the luxury sector, for the full fiscal-year 2022, Tapestry expects double-digit sales growth year over year and mid-teens growth on a two-year basis. As we reported last week, Canada Goose also expects double-digit sales growth year over year and low-single-digit sales growth on a two-year basis for full fiscal 2022. Similarly, in the week ended August 8, 2021, Capri Holdings reported that the company has raised its revenue and operating margin guidance for fiscal 2022 but remains “cautiously optimistic” about the rest of the year.
In luxury e-commerce, Farfetch maintains its outlook for fiscal 2021, expecting 35%–40% GMV growth and an adjusted EBITDA margin of 1%–2%. Last week, management at The RealReal noted that the company expects top-line year-over-year growth of over 30% “for the foreseeable future.”
Mass merchandisers are sustaining their growth momentum. For the second half of 2021, Target expects comp growth in high single digits year over year. For the full year 2021, the company expects its operating margin to be 8% or higher. In fiscal 2022, Walmart expects sales growth of 6–7% and operating income to increase by 11%–14%.
In the home and home-improvement retail sector, Lowe’s expects to generate sales of $92 billion in fiscal 2021, representing two-year comps of approximately 30%. Management at Home Depot sees a supportive environment for home-improvement spending over the next several years and noted that during the first two weeks of August, the company’s US comps have been consistent with the second quarter. Similarly, in the week ended August 8, management at Wayfair stated that 3Q21 net revenues will be “somewhat below” 1Q and 2Q levels, but it is “confident that revenue dollars should accelerate sequentially into Q4.”