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 Covid-19 pandemic on performance. Companies featured are those within our Coresight 100 coverage list.
In this report, we focus on companies that reported in the week ended February 20, 2022. For most US retail companies covered in this series, the quarter under review will be the fourth quarter of fiscal 2021 (4Q21, ended January 31, 2022).
In October 2021, US retail sales saw 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. In November 2021, US retail sales continued to see double-digit growth, with sales increasing by a strong revised 14.7% year over year and revised 24.7% on a two-year basis. In December 2021, US retail sales increased by a revised 12.8% year over year and 22.3% on a two-year basis. However, sales growth slowed sequentially in December 2021, possibly reflecting some holiday season shopping being pulled forward into November 2021. In January 2022, US retail sales increased by 8.2% year over year and 22.3% on a two-year basis, against strong 2021 comparatives, boosted by a strong month of job creation and continued average hourly wage growth.
Earnings Insights 4Q21, Week 4
Apparel and Footwear Brand Owners
Apparel and footwear brand owners continue to see strong growth momentum: Crocs reported solid double-digit revenue growth, year over year, and Under Armour reported a high-single-digit year-over-year increase in revenue. In the week ended February 6, 2022, we saw Columbia Sportswear, Deckers Outdoor Corporation, Ralph Lauren, Skechers and VF Corporation report strong double-digit revenue growth, year over year, while Hanesbrands reported single-digit revenue growth. Similarly, in the week ended January 30, 2022, Levi’s reported double-digit year-over-year revenue growth.
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Crocs, Inc. (NasdaqGS: CROX) 4Q21 |
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Commentary |
Crocs reported revenue growth of 42.6%, year over year, and 123.0% on a two-year basis, in 4Q21. Adjusted EPS increased by 102.8%, year over year. By distribution channel, the direct-to-consumer (DTC) business, which includes retail and e-commerce, grew 44.5%, and wholesale revenues grew 40.3%. By geography, Americas’ revenue increased by 51.2% versus 4Q20, wherein DTC revenue increased by 49.3% and wholesale revenue by 52.6%; EMEA (Europe, Middle East and Africa) revenue increased by 22.5% year over year, wherein DTC revenue increased by 18.5% and wholesale revenue by 24.6%; and Asia revenue increased by 10.3% year over year. Within Asia, South Korea and India grew strongly in the quarter. In 4Q21, the company’s gross margin was up 770 basis points (bps) to 63.4% year over year. Gross margin improved across all regions and channels, driven by increased prices and fewer promotions and discounts. During the quarter, Crocs’ inventory increased by 21.9% year over year, with most of the increase driven by rising in-transit inventory due to extended transit times. On January 11, 2022, Crocs filed a trademark application to get a non-fungible token (NFT)-based intellectual property for its new products, officially entering the metaverse. |
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Outlook |
The company reiterated its full-year 2022 guidance and expects its revenue growth (excluding the HEYDUDE brand) to be over 20.0% compared to 2021. The company expects the revenue for HEYDUDE to be in the range of $700–750 million in 2022. For the full-year 2022, Crocs expects adjusted EPS to be in the range of $9.70–$10.30, representing growth of 16.6%–23.2%, year over year. For 1Q22, Crocs expects revenue growth of 31.0%–37.0%, year over year, assuming the HEYDUDE acquisition closes by the end of February 2022. The company has a plan to amplify the HEYDUDE brand through innovative marketing and leveraging Crocs’ strong wholesale relationships to extend distribution. The company believes that HEYDUDE will become a $1 billion brand by 2024. In 1H22, Crocs expects its gross margin to include an incremental $75 million of air freight. To support sales growth, the company expects to invest $170–200 million in capital expenditure in 2022, primarily to continue to expand and automate its distribution capabilities. |
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Under Armour (NYSE: UAA) 4Q21 |
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Commentary |
In 4Q21, Under Armour reported a 9.0% year-over-year increase in revenue—9.3% growth on a two-year basis (versus 4Q19). Adjusted EPS decreased by 83.5% year over year but increased by 133.3% on a two-year basis. By distribution channel, wholesale revenue increased by 16.0%, year over year. DTC revenue increased by 10.0% versus 4Q20, driven by a solid performance in the company’s owned and operated retail stores and 4.0% year-over-year growth in e-commerce (an increase of more than 30% on a two-year basis), with online sales representing 42.0% of the total DTC business during the quarter. By category, apparel revenue increased by 18.0%, year over year, driven by strength in the training and outdoor businesses; footwear revenue increased by 17.0%, driven by the running and training categories; accessories revenue decreased by 27.0% due to lower sales of sports masks compared to 4Q20. By geography, North America witnessed revenue growth of 15.0%, year over year, driven by growth in the wholesale and DTC businesses. International revenue increased by 3.0% versus 4Q20. Within the international business, EMEA’s revenue increased by 24.0% year over year, while the APAC region saw a decline in revenue of 6.0%, due to weak demand in the wholesale business, which more than offset DTC business growth. Latin America’s revenue declined by 22.0%, owing to changes in the company’s business model as the company transitioned certain countries in this region to a strategic distributor model. In North America, Under Armour will continue to focus on three fundamentals to boost sales:
In China, Under Armour noted that it will continue to invest in digital innovation, including working to deliver an improved end-to-end customer engagement platform and ensuring that store expansions are done at an appropriate pace. In 4Q21, gross margin was up 130 bps, year over year, to 50.7%, driven by benefits from favorable pricing related to sales and lower restructuring charges. |
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Outlook |
Under Armour is changing its fiscal year end from December 31 to March 31. Following a three-month transition period (January 1 to March 31, 2022), the company’s fiscal 2023 will run from April 1, 2022, through March 31, 2023 (as such, there will be no fiscal 2022). Under Armour believes that this change will provide greater alignment with its business cycle and financial reporting. Under Armour now expects its revenue for the transition quarter to increase at a mid-single-digit rate (in percentage terms) compared to the previous expectation of a low-single-digit increase. This expectation includes around 10 percentage points of headwinds related to a reduction in the company’s spring/summer 2022 order book due to supply constraints associated with the impacts of Covid-19. In the transition quarter, Under Armour expects its gross margin to be down 200 bps to 48.0% compared to the year-ago period, due to higher freight expenses resulting from pandemic-related supply chain challenges. Under Armour expects supply chain challenges to continue into fiscal 2023—until longer-than-usual transit times, backlogs and congestion find balance, associated freight and logistics costs normalize and inbound shipping delays subside. |
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Walmart (NYSE: WMT) 4Q22 |
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Commentary |
Walmart reported revenue growth of 0.5% year over year, negatively affected by $10.2 billion related to divestitures, as the company has undergone some major continental drift last year with strategic divestments in Argentina, Japan and the UK. On a two-year basis, revenue increased by 7.7%. Adjusted EPS increased by 10.1%, year over year, and by 10.9% on a two-year basis. Walmart’s US segment (excluding Sam’s Club) reported comp growth of 5.6% year over year, with the company claiming market share gains in grocery. Its e-commerce sales grew 1.0%, year over year—identical to the growth reported by Amazon for its Online Stores segment in its 4Q21 (at constant exchange rates, for the quarter ended December 31). Sam’s Club US posted comp growth (excluding fuel and tobacco) of 10.4%, year over year. Sam’s Club membership income increased by 9.1%, driven by an increase in membership, which reached a record high during the quarter. Walmart International (excluding divestitures in Walmart Argentina and UK grocery chain Asda) saw 9.8% sales growth, year over year. E-commerce sales increased by 21.0%, year over year. In 4Q21, the company’s adjusted operating income increased by 5.9%, year over year, negatively affected by around 60 bps due to divestitures in Walmart Argentina, UK grocery chain Asda and Japanese grocer Seiyu. During the quarter, inventory levels were up 26.0% globally and 28.0% in the US, year over year, due to higher cost of goods and higher in-transit shipments. In 4Q21, the company launched Walmart GoLocal, a last-mile delivery solution using crowdsourced platform Spark Driver to help businesses of all sizes reach more customers. As of the end of the quarter, Walmart has 1,000 GoLocal service pickup points and expects to have 5,000 by the end of 2022. |
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Outlook |
For fiscal 2023, Walmart expects total sales to increase by 4.0%, year over year, with US comp sales growth (excluding fuel) of 1.0%–2.0% for 1Q23 and around 3.0% for the full fiscal year. The company expects adjusted EPS for fiscal 2023 to grow by 5.0%–6.0%, year over year. The company expects full-year capital expenditure to be at the upper end of prior guidance of 2.5%–3.0% of sales, with a focus on supply chain, automation, customer-facing initiatives and technology. |
Looking Forward
Apparel and footwear brand owners continue to post strong results. Under Armour raised its revenue guidance for the transition quarter ending March 31, 2022, and now expects revenue growth in the mid-single digits in percentage terms versus the prior expectation of low-single-digit growth, while Crocs is expecting strong double-digit revenue growth, year over year, for fiscal 2022. Columbia Sportswear, Deckers, Levi’s, Ralph Lauren, Skechers and VF Corporation all expect double-digit sales growth in fiscal 2022, while Hanesbrands expects single-digit sales growth. However, apparel and footwear brand owners expect supply chain challenges—such as longer transit times, and higher freight costs and logistics costs—to continue in 2022.
Mass merchandiser Walmart witnessed almost flat sales growth in 4Q21 but expects sales to increase by a low-single-digit percentage, year over year, and EPS to increase by mid-single digits, in fiscal 2022. The company has also raised its capital expenditure guidance to the upper end of the prior guidance of 2.5%–3.5% of sales.