DIpil Das
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 of fiscal 2022 (2Q22) performance (ended July 31, 2022, for most companies).
Companies featured are those on our Coresight 100 coverage list, and we focus on those that reported in the week ended August 14, 2022. For most US retail companies covered in this series, the quarter under review will be the 2Q22.
In April 2022, US retail sales increased by revised 5.5% year over year, against strong 2021 comparatives, indicating that retail sales are healthy. In May 2022, US retail sales increased by revised 6.1% year over year, against very strong May 2021 retail sales data (when pandemic-driven stimulus checks proved a boost to retail spending). In June 2022, US retail sales remained nominally healthy in June, growing 5.6% year over year. However, with our inferred retail-only inflation metric at 7.6%, overall growth of 5.6% in retail sales in June implies consumers are buying fewer items at the store, and there was a real terms sales decline of around 2.0%. US retail traffic grew 2.9% year over year in June 2022, lower than May’s growth of 8.1% year over year.
We assess the recent performance of selected retailers below.
Apparel and Footwear Brand Owners
Overall, most apparel and footwear brand owners have witnessed strong sales growth momentum. This week, we saw Ralph Lauren post single-digit sales growth year over year; however, Hanesbrands reported a double-digit sales decline. Last week, we saw Crocs and Gildan Activewear report strong, double-digit sales growth year over year, while Under Armour reported single-digit sales growth. However, Carter’s posted a single-digit sales decline in its second quarter. In the week ended July 31, Columbia Sportswear, Deckers Outdoor, Levi’s, Skechers and VF Corporation all reported positive sales growth year over year.
| Hanesbrands (NYSE: HBI) 2Q22 | |
| Commentary | Hanesbrands reported a 14.0% year-over-year decline in sales, versus 5.0% growth in the prior quarter, due to the impact of a ransomware attack (announced by the company on May 31, 2022) as well as softer-than-expected point-of-sale trends. Its EPS declined by 29.7% year over year. The company’s adjusted gross margin declined by 120 basis points (bps) year over year to 37.8% due to lower sales volume, input cost inflation, the incremental costs from the ransomware attack and foreign currency exchange rates. According to the company, these headwinds more than offset benefits from its business mix, a first-quarter price increase in its Innerwear business and cost savings. By segment, innerwear sales declined by 12.0% year over year, as the impact of the ransomware attack and softer-than-expected point-of-sale trends offset the benefits from first-quarter price increases and retail space gains. Activewear sales decreased by 18.0% year over year. Champion brand’s sales declined by 25.0% compared to the prior year, and management stated that the brand continued to experience service challenges and product delays. As a result, the brand saw a slowdown in the middle of the quarter, but Hanesbrands feels confident that the business is much stronger than it was pre-pandemic and now plans to expand its product assortment. Sales of other activewear brands decreased by 8.0% over the prior year. Geographically, international sales decreased by 3.0% year over year. Overall, the company sees significant growth opportunities via the expansion of its women’s and kids’ businesses and the expansion in new markets and product categories, such as China and footwear, respectively. The company’s inventory at the end of the 2Q22 was worth $2.09 billion, a 37.0% increase year over year. The increase was driven by higher inflation on input and transportation costs, lower sales and the early arrival of products related to third-quarter commitments. However, the company is confident in the quality of its inventory as around 80.0% of the year-over-year increase is replenishments of innerwear categories. |
| Outlook | For fiscal 2022, Hanesbrands revised down its sales and EPS growth guidance and now expects net sales of $6.45–6.55 billion, compared to its prior guidance of $7.0–7.2 billion, which includes a projected headwind of approximately $165 million from changes in foreign currency exchange rates. The midpoint of this growth represents a 4.0% decline year over year. It expects its adjusted EPS to be in the range of $1.11–$1.23 compared to its prior guidance of $1.64–$1.81, a decline of 32.8%–39.3% year over year. For the 3Q22, the company expects net sales of between $1.73 billion and $1.78 billion. At the midpoint, this represents a 2.0% sales decline year over year. It expects its adjusted EPS to be $0.20–$0.25, representing a decline of 52.8%–62.3% year over year. |
| Ralph Lauren (NYSE: RL) 1Q23 | |
| Commentary | In 1Q23, Ralph Lauren’s revenue increased by 8.0% year over year, versus 18.0% growth in the prior quarter, driven by strong growth across all regions and a mid-teens comparable store sales increase. Its adjusted EPS increased by 28.9% year over year, while the company’s adjusted gross margin was down 180 bps year over year to 68.0%, with better pricing and promotions offset by increased freight costs. By geography, North America’s sales were up 6.0% year over year, Europe’s sales were up 28.0% and Asia’s revenues increased by 26.0% year over year, despite Covid-19 lockdowns in China. Ralph Lauren’s growth is, in part, due to its spring assortment—a hybrid of casual and sophisticated dressing—which led to sales growth in categories such as polo shirts, bottoms, sneakers and sweaters. Meanwhile, the company’s digital ecosystem revenues grew by low-double-digits in the quarter compared to last year, on top of an exceptionally strong comparison of more than 80.0% last year. According to the company, inventories remain well positioned to support its 2023 product elevation and growth plans by region, as the company shifted inventory receipts earlier to mitigate global supply chain disruptions. |
| Outlook | For 2Q23, Ralph Lauren expects year-over-year revenue growth to be centered around 11.0% on a constant-currency basis. It expects its operating margin to be in the range of 15.4%–15.7% on a constant-currency basis, reflecting a continuation of higher freight and marketing expenses, which are expected to normalize in the second half of the year when the company laps cost increases from the prior year. The second quarter outlook also reflects continued caution around consumer sentiment. For fiscal 2023, Ralph Lauren continues to expect constant currency revenues to increase by a high-single-digit year over year, with its guidance centered around 8.0% revenue growth. The company expects its operating margin for fiscal 2023 to be in the range of 14.0%–14.5% in constant currency. The company reiterated its expectation that freight raw materials and labor costs will pressure gross margins in 2022. However, it still expects to open 200 new stores worldwide, largely in Asia, but also in Europe and North America. |
E-commerce
E-commerce and home-shopping players have reported weak top-line performances during the quarter. In its second quarter, Qurate Retail posted a double-digit sales decline year over year. Last week, we saw Alibaba report flat year-over-year sales growth in its first quarter. Previously, in the week ended July 31, Amazon reported single-digit year-over-year sales growth; however, at constant currency, first-party online sales were flat year over.
| Qurate Retail, Inc. (NasdaqGS: QRTE.A) 2Q22 | |
| Commentary | Qurate Retail’s sales declined by 15.7% year over year, versus a 14.0% decline in the prior quarter, due to inflation, lower consumer demand, rising interest rates and the continued effects of the Russia-Ukraine war and the fire at the company’s Rocky Mount facility in December 2021, which caused inventory and supply chain challenges, such as longer delivery times. Its adjusted EPS decreased by 77.8% year over year. By banner, QxH’s sales declined by 12.0% year over year due to a 9.0% decrease in units shipped, reflecting the company’s supply chain challenges. In terms of QxH’s categories, apparel performed the strongest, down 1.0% year over year, while the electronics category recorded the weakest performance, down 33.0% year over year. Overall, categories that performed strongest during the pandemic particularly suffered, such as home office and computers, as customers no longer require new versions of these products. QVC International’s sales declined by 8.0% year over year; specifically, QVC sales in Europe declined by 14.0% year over year due to cautious consumer sentiment caused by inflated prices and the Russia-Ukraine war. On the other hand, QVC’s Japan sales increased by 2.0% year over year. All QVC International categories experienced negative year-over-year growth, except apparel, which grew 5.0%. Zulily sales declined by 45.0% year over year, reflecting supply chain constraints and marketing inefficiencies due to cost inflation. Cornerstone’s sales increased by 4.0% in the reported quarter, with record sales performance in each segment. Meanwhile, e-commerce sales and penetration for Cornerstone increased by 5.0% and 50 bps year over year, respectively. In June 2022, the company unveiled Project Athens, a three-year plan to establish revenue stability, expand its operating income before depreciation and amortization (OIBDA) margin and increase its free cash flow generation. During the quarter, Qurate also announced a new agreement with Fanatics, an online retailer of licensed sportswear and sports collectibles, which will launch in late 2022 on HSN. The deal includes a wide selection of available Fanatics products, exclusives for HSN and QVC, and two Fanatics “Today’s Special Value” per year. Additionally, Qurate announced a new deal to bring HSN to YouTube TV, a streaming platform with more than five million subscribers. |
| Outlook | The company did not provide guidance. However, management stated that it is confident in its strategy to create engaging and personalized shopping experiences. Management also mentioned that the company has identified multiple avenues to generate hundreds of millions of dollars in net adjusted OIBDA dollars over the next three years. Many of these programs are already underway, and others will be implemented in the second half of 2022. It expects to see the impact of these efforts flow in 2023 and 2024. |
Luxury Companies
| Capri Holdings (NYSE: CPRI) 1Q23 | |
| Commentary | Capri Holdings reported a sales increase of 8.5% year over year, versus 24.6% growth in the prior quarter. The company’s gross margin contracted 200 bps year over year to 66.3%, while its operating margin was 17.0% (down 360 bps). The company attributed these contractions to higher supply chain and marketing costs. Management noted the strong performances of all three of its brands, Versace, Jimmy Choo and Michael Kors. Jimmy Choo performed the strongest, with sales up 21.1% year over year, while Versace’s sales were up 14.6% and Michael Kors’ revenues grew by 4.8%. By geography, the Americas’ sales performance exceeded expectations, growing 11.0% year over year. In the Europe, Middle East and Africa (EMEA) region, sales were up 21.0% year over year, driven by local consumer demand and a rise in pan-European tourism. In Asia, sales were down 14.0% year over year, reflecting a mid-30% decline in Mainland China’s sales, partially offset by improving trends in Japan and Southeast Asia—excluding Mainland China, sales in Asia were up 21.0%. Management remarked that it ended the quarter with inventory up 66.0% year over year due to a historically low comparative last year—compared to pre-Covid-19 levels, inventory was up 25.0%. Previously, the company pursued higher inventory levels to mitigate the risk of supply chain delays and now expects them to moderate over the remainder of the year. |
| Outlook | In 2Q23, Capri Holding expects total revenues of $1.4 billion, representing year-over-year growth of 8.0%, despite forecasting revenues in China to be down 20.0% year over year during the quarter. Meanwhile, it expects a diluted EPS of $1.55 and its gross margin to contract in the second quarter due to higher supply chain costs, the negative impact of foreign exchange and lower revenues from China, which tends to be a higher margin region. For fiscal 2023, the company revised down its sales growth guidance from what it provided during its investor day in July and now expects it to grow by a low-single-digit year over year. However, the company did not revise its guidance for an adjusted EPS of $6.85 and an operating margin of 18.0%. |
Looking Forward
As most apparel and footwear brand owners revise down their guidance, many continue to report strong sales growth. This week, we saw Ralph Lauren post high-single-digit sales growth year over year; however, Hanesbrands reported a double-digit sales decline year over year. Negative gross margins remain a concern for these companies due to incremental freight costs, despite being partially offset by price increases. For fiscal 2022, Hanesbrands revised down its sales and EPS growth guidance and now expects its sales to decline by single-digit year over year and EPS to decline by double-digits. On the other hand, Ralph Lauren reiterated its sales growth guidance for fiscal 2023, continuing to expect high-single-digit year-over-year sales growth and an operating margin in the range of 14.0%–14.5% in constant currency. Last week, we saw Carter’s and Crocs revise down their net sales and EPS guidance and Under Armour revise down its EPS guidance, while Gildan Activewear’s sales CAGR outlook from 2022 to 2024 reflects net sales growth of a high-single-digit to double-digits. In the week ended July 31, we saw Columbia Sportswear, Skechers and VF Corporation revise down their EPS guidance for their respective fiscal years, while Deckers Outdoor Corporation raised its EPS guidance for fiscal 2023. However, all the companies, except VF Corporation, reported that they expect double-digit net sales growth for their respective fiscal years.
E-commerce players are witnessing weak top-line performances, with Qurate Retail reporting a double-digit sales decline year over year. The company did not provide financial guidance for fiscal 2022; however, management stated that it is confident in its go-forward strategy for the company to create engaging and personalized shopping experiences for its customers. Last week, Alibaba did not provide financial guidance for fiscal 2023. However, management believes that it might see many risks from slowing macro activities in the coming months. In the week ended July 31, we saw Amazon report that it expects its year-over-year revenue growth in 3Q22 to be in double digits.
Luxury company Capri Holdings reported double-digit sales growth year-over-year in its first quarter. For full-year fiscal 2023, the company revised down its sales growth guidance and now expects it to grow by low-single-digit year over year compared to prior guidance of mid-single-digit growth; however, it reiterated its guidance for an adjusted EPS of $6.85 and an operating margin of 18.0%.