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 third-quarter 2021 performance (ended September 30, 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 November 14, 2021. For most US retail companies covered in this series, the quarter under review will be the third quarter of fiscal 2021 (3Q21). In July 2021, US retail sales grew by a strong 9.6% year over year and by 21.4% when compared to 2019 values. Similarly, in August 2021, US retail sales grew by a very strong 12.0% year over year and by 19.7% from the corresponding quarter of 2019 values, demonstrating consumers’ willingness to spend and a strong back-to-school season. September 2021 saw year-over-year retail sales growth decelerate to a still-strong 11.1% and rose by 25.8% on a two-year basis.  Overall, in September 2021, the demand for goods remained solid even as consumer spending is shifting back to services and the number of workers heading back to the office. We assess the recent performance of selected retailers and brand owners below.

Beauty Brands and Retailers

Overall, beauty brand owners are witnessing a recovery. While Coty reported a low-single-digit sales decline on a two-year basis, the company raised its fiscal 2022 comp guidance to low to mid-teens, from low teens previously. Last Week, Estée Lauder reported a double-digit sales increase on a two-year basis.

	Coty (NYSE: COTY) 1Q22
Commentary	Coty reported a 22% year-over-year revenue increase, but a decline of 3% on a two-year basis (compared to the corresponding quarter of 2020). Adjusted EPS was $0.08, improving from $(0.01) in the same quarter last year. Coty reported very robust Prestige fragrance trends, particularly in the US, China and Travel Retail, with nearly all brands exhibiting strong growth—propelled in part by the launch of Burberry Hero, Calvin Klein Defy and Gucci Flora Gorgeous Gardenia and the relaunch of Kylie Cosmetics. Prestige cosmetics sales more than doubled. Key brands in both Prestige and Consumer Beauty are accelerating, providing Coty the opportunity to gain market share and new businesses in key regions. The company saw growth across all regions and the US and China continued to be standout performers. The Americas grew 23% year over year, supported by double-digit growth in the US. Europe, the Middle East and Asia (EMEA) sales increased by 17% year over year and UK, Russia, and local Travel Retail were the top contributors. The Asia-Pacific region increased by 29.0% year over year with local Travel Retail tripling year over year and China seeing nearly 50% growth during the quarter. Adjusted gross margin increased by nearly 500 basis points year over year to 63.4% and 250 basis points from the most recent quarter. The increase was driven by a favorable mix, lower excess and obsolescence, its materials cost reduction program, prestige growth and supply chain productivity.
Outlook	For 1H22, Coty projects low teens comparable sales growth in the second quarter, with sellout slightly higher and an EBITDA margin expansion of nearly 100 basis points versus 1H21. For the full year, Coty lifted guidance for comparable sales growth to low to mid-teens, from low teens growth. The company projects an adjusted EBITDA of $900 million for FY22, as it is strategically reinvesting gross margin gain and cost savings in its brands, aiming to maximize value and drive sustained growth in the second half of the year and beyond. Coty targets an adjusted EPS of $0.19–$0.23 for the full year, up from $0.01 in FY21.

Food Retailers

	Grocery Outlet Holding Corp (NasdaqGS: GO) 3Q21
Commentary	The company reported a revenue increase of 0.6% year over year as it continues to cycle pandemic sales gains. On a two-year basis (versus the corresponding quarter in fiscal 2019), the company’s revenue increased by 17.8%. Adjusted EPS increased by over 9% on a two-year basis, but declined by 52% year over year. Comparable store sales decreased by 4.3% year over year compared to a 9.1% increase in the same period last year. Management stated that the year-over-year decline was due to lower traffic but was stable when compared to the second quarter of 2021. The company reported a third-quarter gross margin of 30.8%, above its expectations and in line with pre-pandemic levels, despite inflationary pressure. The gross margin decreased by approximately 40 bps year over year, primarily due to the normalization of inventory turns and higher freight, fuel and supply chain costs. In the third quarter, the company opened seven new stores, ending the quarter with 407 stores across six states.
Outlook	To boost trip frequency, the company plans to strategically expand its product assortment and has recently added 200 new Stock Keeping Units (SKUs). Its Natural, Organic, Specialty, Healthy (NOSH) category has been a primary focus for product expansion, in addition to ethnic, fresh and local product categories. The company expects fourth-quarter comparable stores sales to be down 2.5%–3.5% year over year, as the company remains cognizant of ongoing supply chain issues and consumer demand uncertainty. It expects total sales for the fourth quarter to be in the range of $700–775 million. The company is expecting to open eight new stores in the next quarter, with most opening towards the end of the year.

Luxury Companies

US-based luxury companies are witnessing slow sales recoveries from pre-pandemic levels. Canada Goose reported a sales decline of approximately 21% on a two-year basis—however, Tapestry recorded a 9% sales increase on a two-year basis. Last week, we saw Capri Holdings post a sales decline of 10% on a two-year basis.

	Canada Goose (TSX: GOOS) 2Q22
Commentary	Canada Goose reported year-over-year revenue growth of 19.6%. On a two-year basis, the company reported a revenue decline of 20.8%. Its adjusted EPS increased by 20.0% year over year. The company’s direct-to-consumer (DTC) business reported year-over-year growth of over 80%, supported by strong recovery across its existing retail stores as well as by a 33.8% increase in its digital business. Wholesale revenues were up 25%, caused by wholesale partners requesting earlier order shipments due to a lower level of Covid-19 disruptions compared to the same quarter last year. The company’s wholesale gross margin was 49.4% and its DTC gross margin was 73.7%. Wholesale gross margin increased year over year due to a lower proportion of sales to international distributors, while DTC gross margin came in lower than the company expected due to a higher proportion of sales in low-margin non-parka categories. The company expects its sell-through mix to return to higher-margin styles in peak-trading months. Canada Goose reported outsized SG&A growth, reaching 62%, caused by increased spend in demand creation and strategic investments. However, its EBIT margin was slightly lower last year’s, at 6.9%. The company expects SG&A growth to slow through the year while incremental revenue from new initiatives will drive benefits.
Outlook	Canada Goose raised its outlook based on current trends and year-to-date performance. It now expects revenue between C$1.13–1.18 billion ($0.91–0.95 billion), compared to the previous guidance exceeding C$1.0 billion ($0.8 billion) representing growth between 13%–18%. The company expects an adjusted EBIT margin of 16.5%–17.7% and adjusted EPS of C$1.17–C$1.33 ($0.94–$1.07). The guidance includes the assumptions that DTC revenues will be approximately 70% of total revenue and that wholesale revenue growth will be in the mid-single digits compared to fiscal 2021 wholesale revenues.
	Tapestry (NYSE: TPR) 1Q22
Commentary	Tapestry reported 26% year-over-year growth in its first quarter, ended October 2, 2021. On a two-year basis, the company recorded 9% growth. Adjusted EPS increased by 41.4% year over year and 105% on a two-year basis. Growth was driven by a nearly 50% year-over-year increase in digital sales, a 40% increase in its North American business, and over 25% year-over-year sales growth in China. The gross margin increased by around 140 basis points compared to last year and over 460 basis points versus FY20, despite higher freight costs due to industry-wide supply chain disruptions. By brand, Coach performed the strongest, recording a revenue increase of 27% year over year and 15% on a two-year basis. Kate Spade revenues were up 25% year over year but down 2% on a two-year basis, while Stuart Weitzman revenues were up 18% year over year but down 23% on a two-year basis. The company declared a quarterly cash dividend of $0.25 per common share payable in December 2021.
Outlook	Tapestry raised full-year guidance for fiscal 2022: it now expects revenues to come in at $6.6 billion versus the previous $6.4 billion, representing 3% growth. The company expects modest pressure on its gross margin throughout the year, most acutely during the second and third quarters—due to additional freight investments. Excluding about 200 basis points due to impact of freight costs, the underlying gross margin expanded primarily due to lower promotional activity, increased SKU productivity and price increases that the company plans to implement during the rest of the year. The company anticipates an annual dividend rate of $1.00 per share or $250 million returning to shareholders in fiscal 2022. Tapestry expects to incur approximately $220 million in capital expenditure during fiscal 2022. It is allocating approximately 45% of this to store development, mostly in China, and the rest for digital and IT initiatives, including initial investments related to the development of a new fulfillment center to drive growth and speed to market. The company expects inventory levels to increase significantly during the rest of this year as it pulls forward receipts to meet consumer demand and work around long lead times from supply chain disruptions.

Luxury E-Commerce

	The RealReal (NasdaqGS: REAL) 3Q21
Commentary	The RealReal reported a revenue increase of 53% year over year and 46% versus the same period in 2019. Gross Merchandise Volume (GMV) was up 50% versus last year and up 46% on a two-year basis. Gross profit increased by 44% year over year, as gross profit per order improved by $4.0, to $94.0. Adjusted EBITDA was $(31.5) million, compared to $(29.3) million in the third quarter last year and $(20.1) million in 2019. The company’s performance was driven by strong growth in consignment and service revenues, and direct revenues. Management reported that there has been a resurgence in supply at its authentication centers and that product supply was up—driven by at-home consignments, which exceeded pre-pandemic levels. Average order value increased by 9%, driven by a 10% increase in units per transaction and slightly offset by lower average selling price. While The RealReal is insulated from some supply challenges that are impacting other businesses, it is experiencing high shipping costs and staffing challenges. The company is addressing these by diversifying shipping and automating operations in authentication centers.
Outlook	The company stated that it is confident in its ability to manage ongoing supply chain challenges. While it is in the early stages of delivering operational expense leverage, it also believes it is beginning to see the benefits of previous investments. Management stated that “overall, our business is continuing to experience very positive trends, and we believe these trends will continue through the end of the year and into 2022.” The RealReal expects to resume providing annual and quarterly guidance in 2022, along with a timeline to achieve adjusted EBITDA profitability.

Looking Forward

Beauty brand owners are reporting a recovery: Coty raised its fiscal 2022 comparable sales growth guidance to low to mid-teens year over year, from its previous guidance of low teens. As we reported last week, Estée Lauder expects organic sales growth of 9%–12% year over year in fiscal 2022 and the company is seeing strong growth across the fragrance and skincare categories. Although haircare and makeup categories are witnessing slower sales recoveries, Estée Lauder remains optimistic for the next quarter. Overall, US-based luxury brands and retailers are reporting a slow recovery. On a two-year basis, Canada Goose witnessed a double-digit decline in sales; however, Tapestry reported positive single-digit sales growth on a two-year basis. Last week, we saw Capri Holdings’ sales decline by double-digits on a two-year basis. Nevertheless, all the three luxury companies remain optimistic for the next quarter and have raised their fiscal 2022 guidance. Luxury e-commerce platform The RealReal continues to post strong topline expansion in the latest quarter. The company’s management believes that this trend will continue to the end of the year and into 2022. Food retailer Grocery Outlet expects its comps to be down low single digits in the next quarter. The company noted that ongoing supply chain disruptions and uncertain consumer demand remain key headwinds. Nevertheless, the company continues to expand its store estate.