Warning Light Flashes on Retail Outlook
Fashion retailers are bringing the fourth quarter in for a bumpy landing.
While major players gathered at the 25th annual ICR retail conference in Orlando, Florida, on Monday, many weighed in for the first time on holiday sales and year-end earnings forecasts.
More from WWD
The result was decidedly mixed, skewing toward dour given the economy and a trickier consumer.
Lululemon Athletica Inc., for instance, said that fourth-quarter sales are tracking up 25 percent or better, but warned that gross margins would be much weaker than forecast.
American Eagle Outfitters, Abercrombie & Fitch, Guess Inc., J. Jill Inc. and others were also out and about, whether just meeting with investors, giving presentations to analysts or tweaking their numbers.
Macy’s Inc. started the ICR holiday reveal ball rolling on Friday, noting that its quarterly numbers would hit its target, but that the lulls during nonpeak times last month were worse than expected.
At the conference on Monday, Jeff Gennette, Macy’s chairman and chief executive officer, said the company was going to be “more conservative” this year, but ready to ramp up inventory with “a healthy open-to-buy reserve” if consumers start buying.
Brooke Roach, an analyst at Goldman Sachs, described the Macy’s financial update as “a mixed to slightly weaker read-through for key apparel vendors such as PVH Corp., Ralph Lauren Corp., Levi Strauss & Co. and VF Corp.…where weaker sales trends outside of key event-driven periods could weigh on 2023 growth momentum.”
Across the broader retail landscape, there were indications of retrenchment.
“We see the updates as largely negative for the softlines group, with few outperformers on sales, and more comments on weaker margin trends vs. our prior expectations,” Roach said.
One sign of comparative strength came from American Eagle Outfitters and Abercrombie, which the analyst noted, “reported stronger results and called out inventories in line with prior expectations, a positive read-through to select specialty retail promotional pressure.”
Oliver Chen, an analyst at Cowen, saw a retail picture of “stabilizing inventory, but uncertain consumer demand.”
“We are seeing more normalizing inventory levels with retailers, such as Macy’s, American Eagle Outfitters and Tilly’s, highlighting a cleaner inventory as we enter 2023.” “American Eagle Outfitters now expects inventory down year-over-year in the fourth quarter and Macy’s also noted that their inventories are down low-single digits year-over-year. As the overall inventory position is much leaner heading into fiscal year 2023, we expect stabilizing promotional trends, but it is likely that average unit retail will remain pressured compared to last year, especially in the first half,” Chen wrote.
Investors ran hot and cold.
Among the stocks declining on quarterly updates were Lululemon, down 9.3 percent to $298.66; Chico’s, 8.4 percent to $4.82, and Macy’s, 7.7 percent to $20.43. American Eagle was up for most of the day, but closed down 0.6 percent to $14.91.
Abercrombie was the outlier, with its shares gaining 8.7 percent to $27.40.
Here, a closer look at how some of fashion’s major retail players are positioning themselves after the holiday season and pitching investors on their plans to power through 2023.
Macy’s Inc.
In sync with the consumers it serves, Macy’s Inc. is holding back on the buying.
“When you think about how we’re looking at 2023, we’re going to be more conservative with our receipts, and we’re holding back a healthy open-to-buy reserve to be able to respond as the customer does, by category, in the season,” Gennette said during his presentation at the ICR Conference.
Gennette said Macy’s is “taking a cautious view” but “will be ready if the customer pivots,” meaning the company will be in a position — and is agile enough — to chase brands and items as trends emerge.
He said the $24 billion Macy’s Inc. has “a very strong balance sheet, which gives us the flexibility and the agility to be able to respond as the customer goes.” The company is “developing a stronger prowess with inventory freshness and really just being laser-focused on inventory control and inventory productivity,” Gennette said.
He said Macy’s is focusing on “fashion and trends that [aren’t] necessarily dedicated to a particular brand,” but is oriented to how customers might see themselves dressing and how they might be inspired to dress.
A big element of Macy’s merchandise strategy entails a three-year program to reinvent all of its private brands, “either refreshing existing ones or developing new ones, and really looking at the life stages of our very diverse, multigenerational customer base and ensuring that we have the right content that we uniquely control.”
Gennette said the company’s private brand business, as a percentage of the total business, will go up. “You’re going to see the [cost of goods sold] improvement in that and the profitability opportunity that’s going to come from that. And a testament to that is what’s been happening with the INC brand, which is our number-one women’s sportswear brand. That has been under development over the past year, and you really see it in the comps that we’re now getting.”
In an interview with WWD last October, the CEO said private brands represented 16 percent of Macy’s total business and that of all the businesses at Macy’s, private brands would grow at one of the fastest rates. Another 10 percent-plus of Macy’s volume is generated by exclusive merchandise from brands that aren’t exclusive to the store, bringing its level of merchandise exclusivity to more than 25 percent of the assortment.
Macy’s move into an online marketplace format has enabled the company to offer, so far, 400 brands it didn’t offer before. “The big hallmark there is the amount of tangential categories that we’re now in and categories that, frankly, from an owned and licensed model were not profitable for us to carry,” Gennette said. “Now with marketplace, we have a new model that gives us lots of leverage in categories that customers expect from us and trust us to carry at profitable levels. In the holiday time frame, you saw that in the electronics business, in the game business, with the Xbox business. Those were all the bestsellers for us, during the holiday season.
Later this year, the Bloomingdale’s division of Macy’s Inc. will begin to phase in its own online marketplace model.
Macy’s media network, Gennette added, also helps the company attract new brands “with a new profit pool….It’s becoming marked in terms of its contributions to our overall profitability.”
Last Friday, Macy’s issued preliminary results for the fourth quarter, which ends Jan. 28. The retailer’s fourth-quarter net sales are now expected to be at the low end to midpoint of the previously issued range of $8.16 billion to $8.4 billion. Adjusted diluted earnings per share are expected to be in the previously issued range of $1.47 to $1.67.
The company expects to report full results for the fourth quarter and fiscal year 2022 in early March. The guidance for the period was provided during the company’s Nov. 17, 2022, earnings call on the third quarter.
On a percentage basis, total end-of-quarter inventories are on track to be slightly below last year and down midteens relative to 2019.
During the ICR presentation, Gennette said his team “did a good job of executing a very competitive quarter. It was particularly competitive all the way through.”
Gennette said that similar to 2019, peak sales periods in 2022 occurred during Thanksgiving week, the week after which included Cyber Monday and weeks four and five of December. However, he also cited “deeper-than-expected lulls” in weeks two and three of December as well as weeks one through three of November.
On the positive side, “all through the holiday season, both Bloomingdale’s and Bluemercury and the luxury sector were quite healthy and they outperformed.”
“Overall, we’ve responded quite well to what we needed to do with planned promotions to respond to the competitive environment. What we saw was occasion-based shopping was robust, as was gifting as we got into the balance of the Christmas-Hanukkah time frame. And that was fortified through what we are doing with pricing science as well as our commitment on newness,” the CEO said.
Gifting and occasion-based shopping have been strong since the first quarter and through the fourth quarter, in particular dress-up shoes, men’s suits and luggage, Gennette said.
On the other hand, “When you look at the self-purchase, [with] a lot of the sportswear businesses, casual apparel and some of the home categories, that lull was deeper than we expected. We’re thinking about self-purchase as a more fundamental part of the first half of 2023 as a percent of our overall sales,” Gennette said.
Adrian Mitchell, Macy’s Inc. chief financial officer, added: “Clearly, for the holiday season, folks were buying toys. They were buying occasion-based items, they were buying gifting. But for things for themselves and their homes, that’s where we saw the drag.
“We look at our credit card data; there are some indicators that continue in a direction where payment rates are deteriorating, debt balances are higher. And that’s an indication that the consumer just has less capacity to spend,” Mitchell said.
“As we look at the macro factors, we see that inflation continues to outpace wage growth; wage growth is beginning to slow down. Inflation is beginning to slow down, but the capacity to spend is really under pressure and we believe that’s going to continue into 2023.”
Lululemon Athletica Inc.
Lululemon Athletica Inc. rattled investors Monday morning with a fourth-quarter outlook that showed some gross margin slide even as profits were seen coming in on target.
Shares of the active firm fell sharply as investors read the tea leaves of gross margins, which the active giant said would decline by 90 to 110 basis points this quarter instead of gaining 10 to 20 basis points, as previously projected.
However, the firm said it would “leverage” its selling, general and administrative expenses by 100 to 120 basis points, instead of the previously expected 30 to 50 basis points, helping to keep the bottom line on track.
Lululemon narrowed its forecast for diluted earnings per share and is now seeing a range of $4.22 to $4.27 where it previously projected profits of $4.20 to $4.30. Fourth-quarter sales are slated to range from $2.66 billion to $2.7 billion, an increase of 25 to 27 percent from a year earlier. Before, the company forecast sales between $2.605 billion and $2.655 billion.
The update raised some questions about the brand situation at the business, which has constantly been ahead of the fashion and retail curve.
Simeon Siegel, a stock analyst at BMO, said stock multiples are often tied to revenues, but that the top line can be a lagging indicator.
“Quality of sales erode before actual sales,” Siegel said.
Hence, the focus on gross margins.
“Lululemon’s clearly a strong brand with a strong Wall Street fan base — count us in it — but, we fear brand saturation questions are becoming hard to ignore,” he said.
The company will be meeting with investors at the ICR retail conference this week and might offer some more color on results.
“The question is, did Lululemon take their inventory medicine, weighing on gross margins, now entering fiscal year 2023 clean?” Siegel said. “That would be the silver lining of the release. If not, and inventory remains elevated, it will be hard to ignore the margin questions we’ve been asking over the last several quarters.”
Calvin McDonald, Lululemon’s CEO, said he was “pleased” with the companies’ top-line growth and momentum in a “dynamic macro-backdrop.”
“In [the fourth quarter], traffic remains strong across both physical and digital channels, and we anticipate delivering another quarter of solid earnings growth consistent with our updated EPS forecast,” McDonald said, adding that “2022 has been a strong year for Lululemon, and we remain focused on the significant opportunities ahead as we continue to deliver on our Power of Three x2 growth plan.”
American Eagle Outfitters Inc.
American Eagle Outfitters Inc. is coming out of the holiday season with revenues and profits on track to hit the high end of its projections.
But sales still showed a modest decline from a year earlier as the consumer mentality shifted from have-to-buy-before-it’s-all-gone to something more cautious given inflation and the threat of recession.
The retailer, which is parent to American Eagle and Aerie, said its fourth-quarter brand revenues were down about 3 percent as of Saturday. That puts the company, which projected in November that revenues would be down by midsingle digits, at the higher end of its guidance. By brand, the third-quarter trends carried over into the fourth quarter, which has Aerie leading the way. AEO’s Quiet Logistics business is expected to add 2 percentage points to its fourth-quarter brand revenue.
The company also sees gross margins coming in at the high end of its guidance, set at 32 to 33 percent in November.
Jay Schottenstein, AEO’s executive chairman and CEO, said, “Following record performance last year, we achieved our second-highest holiday sales period in company history. I am pleased with results across our brands, and to see profit margins tracking at the high end of our expectations, powered by excellent inventory management and promotional discipline.
“Looking ahead, we are focused on delivering a leading customer experience across brands, while prioritizing free cash flow and shareholder returns,” Schottenstein said.
Inventories at the end of the quarter are expected to be down compared with a year earlier.
That reflects the much more cautious stance the industry is taking heading into 2023.
The question that remains is just how much inventory is left in the overall retail system — and that will become clearer as more retailers weigh in with holiday results.
In holiday 2021, COVID-19 supply chain backups caused out-of-stocks that helped spur shoppers to buy at full price. Last year, merchants stocked up only to find the consumer had cooled.
Abercrombie & Fitch Co.
Abercrombie & Fitch Co. upped its outlook for the 2022 fourth quarter and full year and is now expecting to post positive sales instead of declining sales.
“I am pleased with our quarter-to-date performance. Our brands performed well during the peak holiday selling period, delivering sequential sales trend improvement from third-quarter levels, leading us to increase our fourth-quarter sales and operating margin outlook,” Fran Horowitz, A&F’s CEO, said Monday in a statement.
“The strong momentum we have seen all year at the Abercrombie & Fitch brand continued in the holiday season with the women’s business on track to deliver its highest fourth-quarter sales ever,” Horowitz said. “Importantly, this strong performance has been complemented by an acceleration in men’s growth from third-quarter trends.
“For Hollister, while we expect to finish the fourth quarter with sales below 2021 levels, the sales trend improved nicely from third quarter as we have begun to realize initial benefits from assortment adjustments and personnel changes.”
For the fourth quarter, the company now expects sales to be up 1 to 2 percent, compared to the previous forecast of down 2 to 4 percent.
The operating margin is seen in the range of 6 to 8 percent, up from the previous forecast of from 5 to 7 percent.
For the full fiscal year, net sales are now seen as down around 1 percent, compared to the previous forecast of being down 2 to 3 percent. The operating margin is seen coming in at 2.5 to 3 percent, compared to the earlier forecast of 2 to 3 percent.
Horowitz said that for 2023, the company is playing it cautiously. “We continue to balance playing both offense and defense in this evolving macroeconomic environment,” she said. “We are managing operating expenses tightly, and we continue to target an inventory level consistent with 2021 by year end, positioning our brands to chase receipts in the spring season. At the same time, we are leveraging the company’s strong financial position to drive key, long-term investments in our operations, specifically in technology, stores and supply chain. We believe these investments will best position us to achieve our 2025 Always Forward Plan.” The three core principles of the Always Forward Plan are:
execute focused brand growth plans;
accelerate an enterprise-wide digital “revolution,” and
operate with financial discipline.
Chico’s FAS Inc.
Chico’s FAS Inc. — parent to Chico’s, White House Black Market and Soma — gained ground during the holidays with a 4.9 percent sales gain, but fell short of its projections and felt the sting in its stock price.
The retailer said sales would range from $505 million to $515 million in the quarter, instead of the $535 million to $555 million it expected just before Thanksgiving.
Accordingly, the company said its fourth-quarter bottom line would range from a loss of 2 cents a share to flat instead of the 7 cent to 10 cent gain previously projected.
P.J. Guido, Chico’s chief financial officer, said: “Coming out of [the third quarter] and moving into November, performance remained strong through Cyber Monday. As we moved into December, we did start to see a tick down in store traffic that impacted sales relative to our forecast.”
Sales remained healthy at Chico’s and continued to improve at Soma, but White House Black Market was softer in styles like party dresses and heavy sweaters.
