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 December 5, 2021. For most retail companies covered in this series, the quarter under review will be the third quarter of fiscal 2021 (3Q21), although some companies may have different year ends. In July 2021, US retail sales grew a strong 9.6% year over year and by 21.4% when compared to 2019 values. Similarly, in August 2021, US retail sales grew 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 (compared to the corresponding quarter in 2019). 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. In October, US retail sales continued to witness a double-digit year-over-year increase, fueled by strong growth in several sectors, and sales increased by 23.2% on a two-year basis. US retail traffic saw robust growth of 31.4% year over year, driven by early holiday shopping. We assess the recent performance of selected retailers and brand owners below.

Apparel and Footwear Brand Owners

Overall, apparel and footwear brand owners are witnessing a strong recovery, although with pockets of weakness. This week, we saw PVH Corp. report double-digit sales growth year over year, but a double-digit decline on a two-year basis. Last week, Guess? Inc. reported double-digit revenue growth year over year, and low-single-digit growth on a two-year basis. In the week ended November 7, Hanesbrands and Under Armour reported double-digit revenue growth on a two-year basis, while Ralph Lauren witnessed a double-digit revenue decline. Levi’s reported low-single-digit revenue growth on a two-year basis, while VF Corporation reported a low-single-digit revenue decline, in the week ended October 31.

	PVH Corp. (NYSE: PVH) 3Q21
Commentary	PVH’s third-quarter revenue increased by 10% year over year to $2.33 billion, despite worsening logistics disruptions in October. This included significant US port delays that resulted in a 4% negative impact from an unplanned timing shift for US wholesale shipments from the third quarter into the fourth. However, on a two-year basis revenue declined by 10.4%. By distribution channel, direct-to-consumer revenue was flat year over year while total wholesale revenue increased by 17%. By brand, Tommy Hilfiger reported a 12% year-over-year sales increase, Calvin Klein reported a 22% sales increase and Heritage Brands reported a 36% sales decrease. Revenue through digital channels for the quarter grew approximately 15%. Digital penetration as a percentage of total revenue was approximately 21%. The company’s retail stores continued to face pressure due to the pandemic—the majority of the company’s stores in Australia closed temporarily for most of the third quarter. In Asia, the company continues to invest in driving growth and building awareness for its brands, focusing on key consumer moments, strengthening product storytelling for key categories and products and enhancing the consumer experience in stores, according to the company. China’s Singles’ Day outperformed the company’s plan, recording double-digit sales increases for both Tommy Hilfiger and Calvin Klein with strong full-price selling, which follows an improvement of traffic in the market. The North America region continued to face pressure from the lack of tourism. However, the company stated that its efforts to drive sales from Gen Z and millennials are paying off.
Outlook	For the full year, PVH has reaffirmed the top end of its revenue guidance range and expects revenue to increase by 27.0%–28.0% year over year. The company raised its full-year 2021 EPS guidance to be around $10.8, an increase from its prior $8.8 estimation. The company expects its Adjusted EPS guidance to be around $9.25, increasing from approximately $8.50 previously. The company expects revenue in the fourth quarter to increase in the range of 11.0%–14.0% year over year (and 16.0%–19.0% on a constant-currency basis). PVH expects North America to continue to face the ongoing challenge of reduced international tourism, which was the source of around 30.0%–40.0% of pre-pandemic revenue from the region—and higher for Tommy Hilfiger than for Calvin Klein. PVH is not planning for international tourism to return to any significant level in the fourth quarter.

Beauty Brands and Retailers

The beauty category continues to recover strongly. This week, we saw Ulta Beauty reporting double-digit revenue growth on a two-year basis. In the week ended November 21, Bath & Body Works posted a double-digit sales increase on a two-year basis. In the week ended November 14, Coty reported a low-single-digit sales decline on a two-year basis. Estée Lauder reported a double-digit sales increase on a two-year basis in the week ended November 7.

	Ulta Beauty (NasdaqGS: ULTA) 3Q21
Commentary	Total revenues increased by 28.6% year over year and by 18.6% on a two-year basis. Comp sales increased by 25.8% year over year and by 14.3% on a two-year basis, driven by transaction growth in sales. By category, bath, fragrance, hair care and skincare all delivered strong double-digit comp growth on a two-year basis, while makeup reported a comp decline. CEO David Kimbell stated, “While comp sales in the makeup category are low compared to 2019, momentum is building with both mass and prestige categories improving from the second-quarter trend. Compared to last year, eyes, face and lip continued to deliver strong growth within the makeup category.” New brands such as Bobby Brown and Elaluz, combined with new product launches from a wide range of brands, including ColourPop, NYX, Tarte and Urban Decay, drove growth in the quarter. Gross margin increased by 450 basis points year over year to 39.6%, driven by leveraging fixed costs and salon expenses, channel mix shifts and a higher merchandise margin. Ulta Beauty ended the quarter with 35.9 million loyalty members, 13% above 2020 and 6% above 2019, driven by reactivation of lapsed members and active members retention.
Outlook	Ulta Beauty raised its guidance for fiscal 2021. The company now expects sales of $8.5–8.6 billion, up from the prior guidance range of $8.1–8.3 billion, and 36%–37% year-over-year comp sales growth, which includes anticipated fourth-quarter comp growth of 15%–20% year over year. For fiscal 2021, the company expects a 14.3%–14.5% operating margin year over year, up from the previous guidance of 13%, driven by gross margin expansion, improved merchandise margin and the leveraging of fixed costs and salon costs. EPS guidance was raised to $16.70–$17.10, up from the prior guidance of $14.50–$14.70. In the long term, the company is aiming for a 13%–14% operating margin.

 

Discount Stores

Most discount stores continued their solid run this quarter. This week, Dollar General and Five Below reported positive sales growth both year over year and on a two-year basis, while Ollie’s Bargain Outlet posted a single-digit revenue decline year over year, but double-digit revenue growth on a two-year basis. Last week, Dollar Tree reported positive revenue growth both year over year and on a two-year basis.

	Dollar General (NYSE: DG) 3Q21
Commentary	Total revenues increased by 3.9% year over year and by 21.4% on a two-year basis, driven by positive sales contributions from new stores. Comparable sales declined by 0.4% year over year but increased by 11.6% on a two-year stack. Adjusted EPS declined by 10% year over year but increased by 46.5% on a two-year basis. Dollar General’s operating profit decreased by 13.9% year over year, driven by incremental investments by the company. In terms of the company’s nonconsumables initiative (NCI)—a new and expanded assortment in key nonconsumable categories including home, domestics, housewares, and party and occasion—at the end of the third quarter, NCI was available in nearly 11,000 stores. Management stated that it is seeing a strong performance across its NCI store base and the company plans to expand the offering to a total of more than 11,500 stores by the end of the year. During the quarter, the company opened 14 new Popshelf stores, increasing the total count to 30. Launched in 2020, Popshelf is a concept store that aims to engage customers by offering a differentiated experience through continually refreshed merchandise, with about 95% of items priced at $5 or below.
Outlook	For fiscal 2021, Dollar General raised its revenue and EPS guidance. The company now expects total sales growth of 1.0%–1.5% year over year, compared to its previous expectation of 0.5%–1.5% growth. The company expects a comp sales decline of 3.0%–2.5% year over year, reflecting growth of approximately 13.0%–14.0% on a two-year stack, compared to its previous expectation of a 3.5%–2.5% year-over-year decline. For fiscal 2021, the company expects adjusted EPS in the range of $9.90–$10.20, which represents 21.0%–23.0% growth compared to 2019 and is an increase from its previous adjusted EPS expectation of $9.60–$10.20. The company plans to execute nearly 3,000 real estate projects in fiscal 2022, including 1,100 new store openings. It plans to extend its footprint into Mexico in 2022—the company’s first location outside the US. Dollar General also aims to operate around 1,000 Popshelf stores by end of fiscal 2025.
	Five Below (NasdaqGS: FIVE) 3Q21
Commentary	Total revenues increased by 27.5% year over year and by 61.0% on a two-year basis. Comparable sales increased by 14.8% year over year, driven by comp transactions. EPS increased by 19.4% year over year and by 138.9% on a two-year basis. The company’s gross margin increased by approximately 160 basis points year over year to 33.3%, driven primarily by occupancy leverage of its strong sales results. Its operating margin expanded by 190 basis points year over year and operating profit increased by 75.1% year over year. During the quarter, the company opened 52 new stores, increasing its store count to 1,173 in 40 states, representing a year-over-year increase of 15.2%. Inventory at the end of the third quarter was $521 million, compared to $405 million at the end of the third quarter last year. Average inventory on a per-store basis increased by approximately 5% year over year as selected receipts shifted into the fourth quarter. CEO Joel Anderson stated, “For product, we continue to see broad-based strength across our worlds, especially in the Sports Room, Candy and Create Worlds. Gaming kept growing as a trend, and we are really excited to continue to offer an exclusive line of gaming products under the Bugha brand, the 2019 Fortnite World Cup Champion. On the digital front, we continue to grow our e-commerce operations. We are excited to have opened our third fulfillment center, which is located within our Arizona ship center, and we shipped our first e-commerce order from there in September. Having this additional fulfillment capability will greatly enhance our efficiency, speed and ability to meet the high demand during the fourth quarter.”
Outlook	For the fourth quarter, the company expects total revenue growth of 15%–17% year over year—assuming comparable sales increase in the range of 2%–4% year over year and based on the opening of 17 new stores. For the full fiscal year 2021, Five Below expects net revenue to be in the range of $2.84–2.86 billion, based on opening 170 net new stores and assuming an approximate 30.0% increase in comparable year-over-year sales. Net income is expected to be in the range of $272–279 million and EPS in the range of $4.82–$4.94, which, at the midpoint, is a 56.0% increase over fiscal 2019.
	Ollie’s Bargain Outlet (NasdaqGS: OLLI) 3Q21
Commentary	Total revenues decreased by 7.5% year over year but increased by 17.3% on a two-year basis. Comparable store sales decreased by 15.5% year over year and by 1.3% on a two-year basis. The company’s customer loyalty program, Ollie’s Army, continued to be a key sales driver in the third quarter. Membership increased by almost 10% year over year, ending the period with 12.5 million active members. The company’s gross margin decreased by 160 basis points year over year to 39.8%, due to increased supply chain costs. Its adjusted operating margin decreased by 610 basis points year over year to 7.8%. During the quarter, Ollie’s Bargain Outlet opened 18 new stores, ending the quarter with 430 stores in 29 states, a 10.6% year-over-year increase in its store count. CEO John Swygert stated, “Our third-quarter performance was impacted by greater than anticipated supply chain related headwinds, leading to lower-than-expected results. While we believe that many of the factors impacting us are transitory in nature and we are taking proactive steps to navigate these challenges, these pressures have continued to impact our business in the fourth quarter.
Outlook	For the full year, the company expects comp sales growth of 3.5%–4.0% on a two-year basis, down from prior expectations of 5.0%–7.0% growth. CFO Jay Stasz stated, “We are anticipating continued headwinds in gross margin due to the ongoing supply chain pressures impacting all retailers, including increased transportation and labor costs. We are expecting a gross margin rate of approximately 38.6%–38.8% for the full year. This decrease from the prior guidance of 39.4%–39.5% is due to 45% higher-than-expected inbound transportation costs.”

Food Retailers

	Kroger (NYSE: KR) 3Q21
Commentary	Total revenues excluding fuel increased by 2.9% year over year and by 14.1% on a two-year basis. Comparable store sales excluding fuel increased by 3.1% year over year and by 14.0% on a two-year basis. Adjusted EPS increased by 9.8% year over year and 66% on a two-year basis. Digital sales increased by 103% on a two-year stack. However, CFO Gary Millerchip stated that the company does not expect digital growth to be linear, especially as it cycles last year’s sales spike and customers become more comfortable shopping in store again. On the digital front, the company launched three new offerings during the quarter. Firstly, it introduced Boost by Kroger Plus, an annual membership program that provides customers free delivery and additional fuel points on purchases in four divisions; secondly, it launched Kroger Delivery Now with Instacart nationwide, providing 30-minute delivery across the country; and thirdly, it announced a collaboration with Bed Bath & Beyond and BuyBuy Baby to expand home and baby product offerings, aiming to launch nationally by e-commerce, via Kroger.com, alongside a small-scale physical store pilot. Kroger’s private-label brand Our Brands launched 216 new items during the quarter and plans to launch several differentiated products for the holiday season including Private Selection Holiday Trail Mix and Simple Truth Cranberry Pistachio Bread.
Outlook	Kroger raised its full-year 2021 guidance. It expects comparable sales excluding fuel to be between (0.4)%–(0.2)% year over year, up from prior guidance of (1.5)%–(1.0)%, and on a two-year stack it expects comparable sales to be 13.7%–13.9%, up from prior guidance of 12.6%–13.1%. Adjusted EPS is expected to be in the range of $3.40–$3.50, up from prior guidance of $3.25–$3.35.

Looking Forward

With a strong-demand, higher-cost environment driving fewer markdowns, we are seeing gross margin expansion at a number of full-price discretionary retailers. Supply chain costs are compressing margins in some discount formats such as Ollie’s (this week) and Dollar Tree and Burlington (last week). Strong consumer demand has continued into the holiday season, meaning lower promotional activity is likely to carry elevated gross margins through the next quarter for many retailers with a less-price-sensitive customer. Overall, apparel and footwear brand owners are witnessing a substantial recovery, although with pockets of weakness. PVH Corp. has reiterated the top end of its revenue guidance range and expects revenue to increase by 27.0%–28.0% year over year in fiscal 2021. For the fourth quarter, the company expects revenue to increase in the range of 11.0%–14.0% year over year, despite the ongoing challenge of reduced international tourism in North America. Last week, Guess? reported that it expects revenue in the fourth quarter to be down mid-single digits on a two-year basis. In the week ended November 7, Hanesbrands, Under Armour and Ralph Lauren reported that they have revised up their full-year sales guidance and expect strong double-digit year-over-year revenue growth. Similarly, in the week ended October 31, Levi’s reported that it expects sales growth in the high teens year over year in the fourth quarter and VF Corporation reported that it forecasts year-over-year sales growth of around 30% for fiscal 2022. Beauty brand owners are reporting a strong recovery. Within the beauty category, bath, fragrance, haircare and skincare are recovering strongly, while demand for makeup is recovering gradually. This week, Ulta Beauty raised its sales and operating margin guidance for fiscal 2021. The company now expects 36%–37% year-over-year comp sales growth, which includes expected fourth-quarter comp growth of 15%–20% year over year. Ulta Beauty now expects a 14.3%–14.5% operating margin for the full year, up from previous guidance of 13%. In the week ended November 21, Bath & Body Works reported that it expects year-over-year sales growth in the mid-to-high single digits for the fourth quarter of 2021. Similarly, in the week ended November 14, Coty raised its fiscal 2022 comparable sales growth guidance to low to mid-teens year over year, from its previous guidance of low teens. In the week ended November 7, Estée Lauder reported that it expects organic sales growth of 9.0%–12.0% year over year in fiscal 2022. Most discount stores continue to perform strongly. For fiscal 2021, Dollar General raised its revenue and EPS guidance. The company now expects total sales growth of around 1.0%–1.5% year over year, compared to its previous expectation of 0.5%–1.5% growth. Dollar General expects a comp sales decline of 3.0%–2.5% year over year in 2021, reflecting growth of approximately 13.0%–14.0% on a two-year stack basis. Five Below expects total revenue growth of around 15%–17% year over year for the fourth quarter. On the other hand, Ollie’s Bargain Outlet has revised down its comp growth expectation for 2021. The company now expects comp sales growth of 3.5%–4.0% on a two-year basis, down from the prior expectation of 5.0%–7.0% growth. Last week, Dollar Tree reported that it expects comp growth to be in the low-single-digit range in percentage terms for both the fourth quarter and full-year 2021. Food retailer Kroger has raised its full-year 2021 guidance and now expects comparable sales, excluding fuel, to be between (0.4)% and (0.2)% year over year. On a two-year stack basis, the company expects comps to be 13.7%–13.9%.