Focus on US (textile) retail
US retail sales gain is fuelled by Web
Consumers boosted spending in April to the highest levels in more than a year, accelerating their turn toward online shopping and widening the divide between in-store retailers and Internet outlets pitching lower prices and convenience
While data from the Commerce Department on May 13, 2016 showed overall retail sales rose 1.3 % in April from a month earlier, the category that includes shopping on Amazon.com Inc. and rival websites and apps grew 2.4 %. And in the past year, Internet and catalogue sales have grown more than three times as fast as overall sales, up 10.2 %. Department-store sales, meanwhile, sank 1.7 % over the past 12 months.
Results from the retail sector this past week showed how the shift is knocking down major companies despite resilience in the broader economy. Major retailers including Macy’s Inc., Kohl’s Corp. and Nordstrom Inc. this week reported sharply lower sales and profits, while Gap Inc. said it was considering closing more stores after sales continued to sink.
Amazon is now the second-largest apparel seller in the U.S., behind Wal-Mart Stores Inc., according to Morgan Stanley. That category was once dominated by department stores.
“Just like bookstores and music stores and hardware stores before them, apparel retailers are underestimating how fast Amazon is going to eat their lunch,” said Joel Bines, co-head of consulting firm AlixPartners LLP’s retail practice. “We’ve seen this movie before.”
Executives at traditional large retailers struggled to explain the slump, which for some companies was their worst since the recession. Some pointed to a decrease in mall traffic, while others said shoppers were spending more on items their stores don’t sell such as entertainment, travel and food.
“The consumer was simply spending their hard-earned dollars in experiences, entertainment and to beautify their home,” J.C. Penney Co. Chief Executive Marvin Ellison said Friday after reporting lower-than-expected sales. The chain is responding by adding appliances and other home goods to its stores.
For economists, the data of May 13, 2016 offered a glimmer of optimism, no matter where the money was being spent. Consumers remain the primary driver of the U.S. economy, accounting for more than two-thirds of economic output. A spending slowdown in the first three months of the year was partly responsible for economic growth nearly stalling, climbing at just a 0.5% seasonally adjusted annual rate.
Economists say April’s spending surge points to faster growth, as measured by gross domestic product, this spring. Forecasting firm Macroeconomic Advisers raised its expectation for second-quarter GDP growth to a 2.3 % annualized advance from 2 %. Barclays raised its forecast to 2.2 % from 2%.
The Federal Reserve Bank of Atlanta’s real-time estimate of economic growth moved Friday to a 2.8 % gain, from the prior estimate of 2.2 %.
If consumers can spur stronger economic growth in the coming months, that could influence the Federal Reserve’s decision on when to raise its benchmark interest rate. After the Fed in December raised rates from near-zero, a choppy economic performance so far this year has led the central bank to delay a second increase. Policy makers next meet in mid-June.
“With diminished headwinds from abroad and consumers responding to growing household income and wealth, consumer spending should improve over the course of the second quarter,” Boston Fed President Eric Rosengren said Thursday.
Large department stores were once bellwethers of consumer behaviour, but there has been a clear and growing divergence in recent years.
Improved online sales is driving revenue growth at Blair Candy Co., said owner Pamela Macharola. The business has shifted from only supplying the region around its Altoona, Pa., warehouse to reaching a national customer base nostalgic for classic treats such as Lemonheads and Atomic Fireballs.
“We’re doing very well and we attribute a lot of that to gas prices going down,” she said. “When people feel good, and have more money at the end of the week, they’re willing to spend.”
But larger retailers seem to be struggling to make a similar pivot, even though they are getting an increasing amount of revenue from their own e-commerce operations.
Executives at Nordstrom, which gets 20 % of its sales online, cited weak traffic to malls as well as aggressive discounting online for its slump. “There is a lot of excess product out in the marketplace. It’s certainly easy to shop online. There is some heavy, heavy discounting going on, and we’re seeing that effect in our business,” said co-president Erik Nordstrom.
The global economy is ratcheting up price pressures as well. Consumer prices for apparel, homewares and other goods often imported from overseas have flattened or fallen due to a stronger dollar. In some cases that means retailers’ margins shrink between placing orders and stocking their shelves, IHS economist Chris G. Christopher said.
Even higher-priced luxury retailers haven’t been immune. Hudson’s Bay Co. on May 13, 2016 warned of weaker-than-expected sales for its recent quarter, dragged down by its Saks Fifth Avenue chain.
Foot traffic to apparel stores declined 7.2 % in April, according to John Kernan, an analyst with Cowen & Co. And Nordstrom finance chief Michael Koppel said on May 12, 2016 that “we continue to see traffic falling off in malls.”
When shoppers do visit malls, they are increasingly spending money on entertainment such as movies and bowling and services such as hair salons and fitness centres, according to Liz Holland, chief executive of Abbell Associates, a real-estate redevelopment firm. Despite Amazon’s rise, not all traditional retailers are struggling. Fast-fashion chains such as H&M Hennes & Mauritz AB have been posting strong sales recently, as have specialty retailers like Foot Locker Inc.
Amazon, meanwhile, continues to expand into new categories such as grocery and fashion. The web retailer’s sales jumped 28 % in the latest quarter, its fastest growth since 2012, and the company booked its fourth straight profitable quarter with expanded margins in its core retail business.
Analysts are expecting strong results this coming week from Home Depot Inc. and Lowe’s Cos., which are benefiting from strength in the housing market. And off-price retailer TJX Cos. is expected to post sales increases as well.
But earnings from Wal-Mart and Target Corp. are likely to come under pressure from higher wages and ecommerce investments.
With the unemployment rate at a historically low level—5% in April—and wages showing signs of increasing even beyond the retail sector, consumers are positioned to spend. But they remain cautious nearly seven years after the recession ended. Two-thirds of their outlays go to services, from rent to doctor visits to Netflix subscriptions.
“The consumer sector is the strongest sector in this economy,” IHS’s Mr. Christopher said. “Discount stores are doing well and online stores are doing well, but these department stores are getting just pounded.”
Abercrombie & Fitch proforma results are not so cool
Like a recalcitrant high-school student, Abercrombie & Fitch always seems ready with an excuse. And its latest one may not keep it out of detention.
Apparel retailers have had a brutal first quarter, with Macy’s, Nordstrom and Kohl’s among the hardest hit. Abercrombie, which reports results later this month, is no stranger to pain. The teen-apparel retailer’s same-store sales declined 11%, 8% and 3%, in the fiscal years ending January 2014, 2015 and 2016, respectively.
Earnings also have slumped. But Abercrombie has become adept at getting investors to ignore major costs by training them to focus on so-called pro forma figures. These have stripped out charges related to restructuring business units, the impairment of the value of certain stores and what Abercrombie has called its “profit improvement initiative.” That includes changing its merchandise assortment, beefing up its marketing, closing underperforming stores and investing in e-commerce.
Abercrombie is one of a long list of companies that have been using pro forma metrics to paint a brighter results picture. Reported earnings among S&P 500 companies were 25% lower than pro forma figures in 2015. That was the widest difference since 2008. The Securities and Exchange Commission is weighing whether to curb use of adjusted earnings figures.
At Abercrombie, reported earnings were just 46 % of pro forma ones the past two fiscal years. In the fiscal year ended January 2014, they were 98 %.
Abercrombie says it provides pro forma measures to help investors better understand its operating performance. But the adjustments are questionable: Riding the waves of popularity among a notoriously fickle demographic is core to being a teen retailer.
Abercrombie pushed that envelope further in the most recent fiscal year. It excluded from pro forma earnings USD 20.6 million in charges related to a write-down of its inventory. Absent that, annual pro forma net income would have been USD 57 million, instead of the USD 78 million in its earnings release. Abercrombie’s reported net income, on the other hand, was USD 35.6 million.
The write-down makes sense. As part of its turnaround strategy, the company abandoned its logo-adorned merchandise for a subtler look.
Older inventory, some dating back to late 2013, wasn’t selling, and it needed to make way for the new. The USD 20.6 million reflects the write-downs Abercrombie took, net of the amount it was able to recover selling inventory at a discount.
But the fact Abercrombie’s inventory failed to resonate with customers is reflective of its underlying business. Excluding the cost suggests the company could argue future fashion missteps should be adjusted away.
There are signs things may be improving for Abercrombie. In its fiscal fourth quarter, it posted positive same-store sales for the first time since late 2011. Still, one quarter does not a turnaround make, particularly in light of the tumultuous environment for apparel retail. With Abercrombie shares trading at 20 times forward, unadjusted, earnings estimates, investors shouldn’t be quick to accept excuses.
Home Depot withstands Ill Retail Winds
Betting against home-improvement stores over the past few years has been a mistake. That isn’t likely to change, despite gloom about retailers.
Home Depot Inc. and Lowe’s Cos. have largely been insulated amid an improving housing market and Americans’ willingness to spend on home-improvement projects. And with people moving more now thanks to appreciating home values and low mortgage rates, they are also spending more to refurbish dwellings.
Helping matters, home-improvement retailers haven’t felt the full brunt from Amazon.com Inc. and other online retailers, who continue to swipe share from department and apparel stores.
Home Depot and Lowe’s, which report quarterly results this week, should highlight the favourable macroeconomic environment. Yet Home Depot has made more hay while the sun shone, outperforming Lowe’s by 15 percentage points over the past 12 months.
For investors pitting the two against each other, the larger and more-profitable Home Depot, which reports Tuesday, still appears a better bet. Analysts polled by FactSet estimate earnings of USD 1.35 a share for the fiscal first quarter ended in April, up 17% from a year earlier. It has exceeded analysts’ estimates all but twice over the past five years. Meanwhile, revenue is expected to have increased by 7 % to USD 22.3 billion.
Lowe’s, which reports on May 18, 2016, is having a tougher time reaping similar benefits. It warned in February that sales at its existing stores would slow this year.
Home Depot has benefited from the sales of big-ticket items such as appliances and water heaters. In February, Home Depot said the number of transactions totalling more than USD 900 rose 12 % from a year earlier.
Source Wall Street Journal/ FactSheet
Last summer the average customer transaction hit the highest since 2006. The positive trend is likely to continue, given America’s aging housing stock. Home Depot estimates roughly two-thirds of homes are more than 30 years old.
While Home Depot’s stock has recovered from its decline earlier this year, its valuation is rich, but not outrageous. Fetching roughly 20 times projected earnings over the next 12 months, Home Depot’s multiple is about 8 % lower than last year’s high.
This foundation appears to be as sturdy as ever.
Ralph Lauren with less sales and income
Ralph Lauren’s profit plunged in its latest quarter, and was hit by higher costs and lower U.S. sales, factors intensifying pressure on its new CEO to develop a strategy that will return the company to growth
Net iincome dropped 67 % to USD 41 million for the three months ending April 2, 2016, weighed down by the cost of closing stores and trimming expenses. Sales excluding newly opened and closed stores fell 6 % and total revenue fell 1 % to USD 1.9 billion. Excluding currendy effects, revenue rose 3 % internationally, but fell one percent in the Americas.
Stefan Larsson, CEO since last November stated that he spent his first months at the company doing a “deep dive” to understand how the business works. He added that the company has not focused enough on developing its core offering, described its cost structure as inefficient and pointed out tha<t it is not “nimble enough in the marketplace”. He further said “What I have learned is encouraging, because I know what we need to do differently”.