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 December 13. 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., Costco). 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 12.9% year-over-year jump, with the growth rate almost doubling compared to August. September saw further store reopenings, with many states resuming the reopening of indoor malls as the number of coronavirus cases reduced month over month. In October, US retail sales continued to witness a double-digit year-over-year increase, fueled by strong growth in several sectors. 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. Furthermore, in November, total traffic decline steepened to 37%, as several states reinstituted more restrictive mandates owing to the surge in new coronavirus cases. We assess the recent performance of selected retailers and brand owners below.

Apparel Specialty Retailers

	Lululemon Athletica (NasdaqGS: LULU) 3Q20
Commentary	Total revenues grew 22% versus 2.2% growth in the prior quarter. Comparable sales increased by 19%. The company did not report comps in the prior quarter due to the temporary closing of most of its stores as a result of the pandemic. Lululemon’s women’s apparel business grew 22%, returning to pre-coronavirus growth levels, with strength in both tops and bottoms, while its men’s apparel business grew 14%. In the quarter, store productivity was 82% of last year’s. Management said that the company continued to invest in the product lines that support running, training and yoga. During the quarter, the company’s international revenues increased by 45%, with sales growth of over 100% in China. Management said that the company has tripled the number of stores in Mainland China over the past two years, and its brands are resonating well across both Tier 1 and Tier 2 cities. Lululemon’s direct-to-consumer sales surged 94%, accounting for 42.8% of the company’s total revenues versus 26.9% in 3Q19. Total digital comps surged 93% in the quarter. Management said that the company’s recent partnership with Afterpay is helping Lululemon to acquire new customers. During the quarter, the company opened nine net new company-operated stores, increasing the total store count to 515.
Outlook	For the fourth quarter, the company expects total sales growth to be in the mid-to-high teens, up from prior expectations of a high-single to low-double-digit increase. Lululemon expects store productivity to be about 70% in the fourth quarter compared to year-ago levels. The company expects online sales growth to remain strong in the fourth quarter but moderate modestly from the levels of the third quarter. Management said that the company remains on track to open 30–35 net new stores in 2020. Lululemon plans to operate 100 seasonal pop-up stores in the fourth quarter, up from 70 stores in the third quarter.

Online Apparel Retailers

	Stitch Fix (NasdaqGS: SFIX) 1Q21
Commentary	Total sales grew 10.3% versus 2.6% growth in the prior quarter. The company’s active client base increased by 10% year over year to 3.8 million. Management said that the company delivered a record-high success rate across its subscription offering, which measures the user’s purchase rate on items in their subscription. Growth was driven by the company’s strength in product assortments and algorithm-based recommendation. For example, the company has expanded its athleisure offerings to meet consumers’ new work-from-home requirements. Similarly, the company has been selling more affordably priced products across categories in light of a challenging economic environment. Management said that Stitch Fix’s direct-buy business is serving as one of the key catalysts to expand the company’s addressable market.
Outlook	For the second quarter of fiscal year 2021, Stitch Fix expects sales growth of 12–14%, fueled by an increase in its active client base. For the full fiscal year 2021, Stitch Fix expects revenue growth of 20–25%, implying growth of 29–40% in the second half of the fiscal year.

Food, Drug and Mass Retailers: Discount Stores

	Big Lots (NYSE: BIG) 3Q20
Commentary	Total sales increased by 18.0% versus 31.3% growth in the prior quarter. Comparable sales grew 17.8% versus 31.3% growth in the prior quarter. The company witnessed double-digit comp growth across all of its seven categories, with home-related merchandises performing extremely well. Total digital sales grew 70%. During the quarter, the company introduced curbside pickup and collaborated with Instacart to offer a new same-day delivery facility. Earlier in July, the company collaborated with PICKUP, Big Lots’ delivery partner, to launch same-day delivery on biglots.com. Management said that the same-day delivery offerings through both Instacart and PICKUP drove significant digital sales growth for Big Lots in the third quarter. During the quarter, the company opened 13 new stores and closed six stores, ending the quarter with 1,411 stores and total selling square footage of 32.1 million.
Outlook	The company noted a strong start to the fourth quarter with quarter-to-date comps up in the low double digits. Management said that the company had sold a significantly higher proportion of its Christmas inventory at this point compared to same period last year and added that given a pull forward in sales and elongated holiday shopping season, the company expects business to moderate for the rest of the quarter. The company expects to end the fiscal year 2020 with a total store count of 1,408, with a total of 24 stores opening and 20 closings during the year.

Food, Drug and Mass Retailers: Warehouse Clubs

	Costco (NYSE: COST) 1Q21
Commentary	Total sales increased by 16.9% versus 12.4% growth in the prior quarter. Comparable sales, excluding fuel, grew 17.1% versus 11.4% growth in the prior quarter. US comps, excluding fuel, grew 17.0%, versus 13.6% growth in the prior quarter. Average transaction size grew 9.4%, with 6.5% growth in the US. This was driven by strong sales of home-related merchandise, food and sundries, health and beauty, and fresh foods. Management said that the company went into the Halloween season with lower inventory than normal and came out of it with pretty clean inventory levels. For the Christmas season, Costco has leaned its assortment more toward home-related items and less toward seasonal items such as holiday decorations and gift wraps. Total digital sales, including third-party sales, surged by about 100%. Excluding third-party sales, digital sales grew 86.4%. Total online grocery sales grew by nearly 300% in the quarter. During the quarter, the company opened eight new warehouse units, ending the quarter with the total warehouse square footage at 117 million square feet.
Outlook	In the fiscal year 2021, the company plans to open 20–22 warehouse units, with five to six units in the third quarter and seven to eight in the fourth quarter. For the fiscal year 2021, the company plans to incur capital expenditure of $3.0–3.2 billion.

Home & Home Improvement

	RH (NYSE: RH) 3Q20
Commentary	Total revenues grew 24.6% versus 0.4% growth in the prior quarter. Management said that the company’s revenue growth lagged demand by approximately eight percentage points in the third quarter, due to higher-than-anticipated demand and disruptions across its global supply chain. As the company’s inventory continued to fall short of the consumer demand, RH decided not to mail its Fall 2020 Sourcebooks (catalogs with over 2,500 pages of designs used in conjunction with an app by shoppers to search, browse, bookmark and buy home goods). However, management said that the company’s core demand trends continued to be strong despite the retailer not mailing its Fall 2020 Sourcebooks and postponing new product introductions to the spring of 2021. Core demand grew 47% in August, 45% in September 33% in October and 39% in November.
Outlook	For fiscal year 2020, RH expects revenue growth of about 7% and adjusted operating margin of 21% (versus 14% last year). The company added that it now sees a clear path to an adjusted operating margin of 25% in the coming years. For fiscal year 2021, RH expects to have double-digit revenue growth. From a long-term perspective, the company envisions a possibility that it will have 25% of its business in the US and 75% internationally, with the US business being worth $5–6 billion and the total global business being worth $20–24 billion. The company expects that some level of elevated spending in the home sector will continue through 2021 and possibly beyond, driven by booming real estate activity in second-home markets, an accelerated shift of families moving to larger suburban homes and a general rise in homebuilding activities.

Looking Forward

This week, we continued to see evidence that the crisis will support, and likely accelerate, structural changes in US retail, such as store expansion among discount retailers—including Big Lots, which reported outstanding topline growth and is continuing to expand its store portfolio. This followed the comp growth percentages in the teens reported by Dollar General, Five Below and Ollie’s Bargain Outlet last week. Similarly, in the prior weeks, we saw Dollar Tree and Grocery Outlet reporting double-digit sales growth. We expect discount stores to maintain their winning streak in the next quarter, as consumers continue to trade down to retail formats that emphasize value amid the economic uncertainty. Like discounters, warehouse clubs continued to benefit from the crisis, with Costco reporting double-digit comp growth. Similarly, three weeks earlier, we saw BJ’s reporting strong double-digit comps. These retailers are continuing to expand their store estates. In discretionary sectors, we continue to see strength in the home categories, with RH witnessing double-digit sales growth. This followed remarkable sales growth reported by Home Depot, Lowe’s, Wayfair and Williams-Sonoma in prior weeks. This week, Big Lots and Costco called out “home” as an outperforming category, joining other retailers who reported similar strength in prior weeks’ earnings updates. In the apparel and footwear categories, demand for casual wear and athleisure remained strong, while tailored clothing saw weaknesses. Athleticwear retailer Lululemon posted strong double-digit comp growth. Previously, we saw Dick’s Sporting Goods report outstanding comps, while American Eagle Outfitters, Burlington Stores, Gap Inc. and Urban Outfitters posted a strong sequential increase in toplines in the week ended November 29. As the e-commerce channel continues to help retailers offset lost sales from brick-and-mortar store closures and reduce their in-store inventory, some retailers—such as Big Lots—are looking to strengthen their digital model. This involves the expansion of curbside pickup and same day delivery facilities. Coresight Research expects digital demand to remain elevated in December, with an estimated low-30s-percent rise in online nonfood retail sales, taking e-commerce to 27.6% of all nonfood retail sales. However, online sales tend to come with higher costs and, in the new year, retailers’ margins are likely to be impacted from strong online sales and high shipping surcharges that will come into play during the peak holiday selling season.