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Getting the Pulse of Retail with Quarterly Earnings Report

posted by Professor Marie Driscoll, CFA

Frustration-2.jpgIf it’s August, while many are spending the last weeks of summer on the beach and postponing thoughts of the Back-to-School season with its necessary apparel and supplies purchases, retail analysts are desk bound dissecting earnings reports and conference call notes, eyes wide open for an indication of retail and consumer strength as we head into the second half of the year when the bulk of retail earnings are registered.

The season isn’t over yet, but we’ve heard from many of retails’ big players: Kohls, JC Penney, Macy’s, Target, TJX Companies and Walmart. Generally, retail is less bad than originally thought heading into the second quarter; sequential improvement, but still negative store traffic for many mall-based retailers, while ecommerce growth is eating into profit margins with free shipping. At Kohls, 31% of online purchases are fulfilled in store and digital conversion is up double-digit and management made a call out that early Back-to-School selling was good. At Macy’s fewer tourists penalized results as did fewer transactions and softer store traffic. Sales declined 5.4% and inventory, a more rapid 6.4%. On the plus side, Macy’s is busy opening its off-price concept, Macy’s Backstage (currently 38 locations within existing Macy’s), has new merchandising initiatives in footwear, jewelry and mattresses, and is rolling out enhancements to its loyalty program this fall.

JC Penney disappointed as it closed 127 stores and liquidated inventory in Q2; JCP common shares dropped 17% on the news. Going forward, it will be hard to drive sales growth and margin expansion. That said, JCP management is aggressively remerchandising the stores, adding new and expanded categories of toys, appliances and rolling out Sephora to another 38 locations, while on the apparel front, new contemporary and casual brands will arrive this fall.

…And the Good News…

Target comps turned positive for the first time in five quarters, up 1.3% driven by positive comps in apparel, home and hardlines. Traffic rose 2.1% offset by a modest decline in average ticket. Target is busy launching private label brands to differentiate the store and is enjoying strong momentum with its kid’s brand Cat & Jack ($2 billion in first year sales). TJX Companies was another Q2 winner as its low-price assortments of branded merchandise continue to drive store traffic, resulting in a 3% comp gain that exceeded TJX management guidance. Access to product and speed to market make TJX’s TJ Maxx and Marshalls the go-to weekly shopping destination for fashionistas across the US.

Walmart is executing on all cylinders as it invests simultaneously in employees and the in-store experience as well as ecommerce and price. While these investments may limit earnings growth near term, they are the right strategy for continued relevance in the retail marketplace. US comps rose 1.8% and include a 1.3% traffic gain and the company is guiding for a Q3 comp in the 1.5% to 2% range.

The Takeaway

Investments are necessary to be in the game for the long haul. These retailers are actively investing in their businesses on multiple fronts. Traditional mall based department stores continue to deal with negative traffic trends, while off-the-mall traffic trends are stronger. Investments in private label products and new categories should help retailers in the second half avoid pricing wars that hurt all. The big threat this fall is continued weak store traffic as Amazon continues to improve its go to market strategy with new products, expanded categories and streamlined/faster services.

Topics: retail management, back to school, amazon