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 coronavirus pandemic on third-quarter 2020 performance (ending October 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 November 15. For most US retail companies, the quarter under review will be the third quarter of fiscal year 2020 (ending January 2021), but some of the companies covered have different year ends (e.g., Coty).
In August, US retail sales continued to rebound strongly as the reopening of stores improved, compared to the previous month. In September, US retail sales saw an extraordinary 12.1% year-over-year jump, with the growth rate more than doubling compared to August. This was fueled by strong growth in several sectors and further reopening of stores, with many states resuming the reopening of indoor malls as the number of coronavirus cases reduced month over month. However, in October, many states reported a spike in Covid-19 cases; as a result, the US retail traffic decline steepened, mostly toward the end of the month.
We assess the recent performance of selected retailers and brand owners below.
Beauty Brands and Retailers
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Coty (NYSE: COTY) 1Q21 |
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Commentary |
Total sales declined by 13.0%, a substantial improvement compared to the 62.8% decline in the prior quarter. By channel, Prestige business sales declined by 20.2% and Mass business sales fell 20.6%. By geographic region, Americas’ sales declined by 3.7%, EMEA’s sales fell 21.6% and Asia Pacific witnessed a sales decline of 35.3%. Travel retail remains the most impacted channel, with a sales decline of 70%. E-commerce sales saw triple-digit growth, with online penetration doubling to 13%. CEO Sue Nabi said, “We are seeing net revenues sequentially improving with solid orders in advance of the holiday season. In the first quarter, we have seen strengthened market share in our core markets [and] e-commerce moving from a catch-up mode to a momentum mode, gradually strengthening our foothold in skin care and in China.” Recently, the company appointed Isabelle Bonfanti, formerly at L'Oréal and Hermès, as Chief Commercial Officer of the Prestige business and Jean-Denis Mariani as Chief Digital Officer. |
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Outlook |
CFO Pierre Terisse said, “We just completed October with net revenues down high-single digits [year over year], reflecting strong pre-Christmas orders and confirming a very fast recovery of our net revenues.” The company has listed four key strategic priorities:
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Food, Drug and Mass Retailers: Discount Stores
Commentary|
Grocery Outlet Holding Corp (NasdaqGS:GO) 3Q20 |
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Total sales increased by 17.1% versus 24.3% growth in the prior quarter, while comp sales increased by 9.1%, compared to 16.7% growth in the prior quarter. The company’s sales growth was driven by larger basket size, with consumers continuing to consolidate their shopping trips. Grocery Outlet opened 10 new stores during the quarter, finishing the period with 372 stores in six states. During the quarter, the company invested $35.9 million in capital expenditures as it continues to build new stores and re-invest in the existing fleet. The company said that it had increased its emphasis on digital marketing through digital ads, e-mail and social media platforms. |
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Outlook |
Grocery Outlet noted comps for the fourth quarter to date trending in the positive mid-single digits and expects it to remain at the same levels for the remainder of the quarter. The company expects to end fiscal-year 2020 by opening 34 new stores with no additional closures, expanding the store estate by 10%. In 2021, the company plans to open three to five new stores in the Mid-Atlantic region. Grocery Outlet believes that there is market potential to establish 1,500 store locations nationally over the long term. Grocery Outlet reiterated its stance of e-commerce not being a priority right now as it is hard for the company to replicate the “treasure hunt” experience online and develop deeper connections with consumers. Instead, the company will continue its focus on long-term growth opportunities with real estate expansion. |
Food, Drug and Mass Retailers: Drugstores
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CVS Health (NYSE: CVS) 3Q20 |
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Commentary |
Total revenues grew by 3.5% versus a 3.0% increase in the prior quarter. Retail/Long-Term Care segment revenues grew 5.9%, driven by increased prescription volume (up 4.6%) and front store sales (up 2.7%). Since March, CVS has delivered over 6 million Covid-19 tests across 4,000 locations and plans to have 1,000 sites operating rapid testing by the end of year. The company noted that these Covid-19 testing sites help to draw new customers to CVS stores. The company is also preparing itself to roll out Covid-19 vaccines when they become available. CVS CEO Larry Merlo will retire in February 2021 and will be replaced by Karen Lynch, President of health insurer Aetna (which CVS acquired in 2018). |
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Outlook |
CVS raised its full-year 2020 adjusted EPS guidance to $7.35–7.45, representing growth of 4–5% year over year, versus previous guidance of $7.14–7.25. The operational cash flow guidance for the full year is raised to $12.8–13.3 billion from $11.0–11.5 billion. For the full-year 2020, the company expects to achieve savings of $800–900 million from integration synergies related to the acquisition of Aetna. For the 2021 selling season, the company noted that its renewals are largely complete, with a 98% retention rate. CVS will continue to expand its HealthHub concept stores and plans to reach 600 stores by end of 2020 and 1,300 by end of 2021. Currently, it operates around 450 HealthHub stores in 30 states. In January 2021, the company plans to add in-person behavioral health services in HealthHub stores. The company said it will continue to invest in expanding access to virtual care through its telehealth platforms. |
E-Commerce
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The RealReal (Nasdaq: REAL) 3Q20 |
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Commentary |
Revenue decreased by 4% versus a 20% decline in the prior quarter. In 3Q, consignment and service revenue fell 7% year over year, while direct revenue increased by 11%. GMV fell 3% versus a 20% decline in the prior quarter. The GMV of repeat customers was 82.9%, compared with 81.8% in 3Q19. The average order value was $446, an increase of 2% year over year. The company said that its supply trends are seeing strong sequential improvement, with total supply units shipped to its e-commerce facilities increasing by 3% year over year and 32% quarter over quarter. On the demand side, the company’s traffic trends remained healthy, with online visits increasing by 18% year over year in the third quarter. In October, the company entered into a partnership with Gucci to launch an online shop featuring second-hand Gucci items and promote circularity for luxury fashion. This is the company’s first collaboration with a brand on a dedicated shop on TheRealReal.com. Furthermore, the partnership promotes sustainability in retail: For all Gucci purchases, The RealReal will plant a tree through nonprofit One Tree Planted. |
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Outlook |
Management noted that GMV was about 5% down in October but remains optimistic that GMV can return to growth for the balance of the fourth quarter (November and December), with improvement in supply trends and pickup in demand for women’s apparel and shoes. In October, the company’s retail and luxury consignment office supply increased by 48% versus a 20% decline in 3Q, amplifying the company’s overall supply recovery in the fourth quarter. |
Looking Forward
This week, we saw more evidence that the crisis will support, and likely accelerate, structural changes in US retail: Discount store Grocery Outlet is continuing to expand its store estates.
Pre-owned luxury platform The RealReal is seeing a substantial improvement in its demand and supply trends. The company continued to prioritize sustainability initiatives with its recent partnership with Gucci.
In discretionary sectors, beauty is witnessing strong recovery, with the skincare category seeing a strong positive trend. In non-discretionary categories, health continued to be strong.
Holiday demand is expected to be healthy for the retail industry: Coresight Research estimates an approximate 5% year-over-year rise in total retail sales for the holiday period (October to December). Brands and retailers are witnessing strong pre-Christmas orders, for example, Coty.
We expect total online retail sales to rise by one-third (33.5%) year over year in the holiday period. Reinforcing this, Coresight Research’s November 10 survey of US consumers found that 29.4% of holiday shoppers plan to switch some or all of their holiday spending from stores to e-commerce, improved from 24.9% a month ago.