According to NRF numbers, the holiday sales period was a welcome gift, but the wrapping paper wasn't spread evenly across the industry. Here's a breakdown, as major retailers prepare to report earnings.
Even with fewer days to buy holiday gifts, the healthy U.S. consumer appeared to give many retail companies a boost in the last quarter of 2019.
That said, the wrapping paper might not have been smoothly spread around the industry, and some retailers probably did a lot better than others. The next couple weeks could help tell the tale as major big box stores prepare to report earnings.
At first glance, retailers faced a handicap going into the holiday period. That was an unwelcome gift from a late Thanksgiving that squeezed the unofficial start of the industry’s most important selling period to the tightest timeline possible.
Despite that, the National Retail Federation said holiday sales outpaced its own forecast, rising 4.1% from the same period a year earlier to $730.2 billion. Online and other non-store sales rose 14.6% to $167.8 billion, and are included in the total results.
“These numbers validate continued optimism for increased investment and opportunity in the retail industry,” NRF Chief Executive Matthew Shay said. “This is a consumer-driven economy, and by any measure, the consumer has put the economy in a solid position for continued growth. This is a strong finish to the holiday season, and we think it’s a positive indicator of what’s ahead.”
That may be true, but what we’ve seen from a handful of preliminary holiday sales results so far is a mixed bag of highs and lows for retailers across the board. Amazon (AMZN), which already reported earnings, said it rang up “record-breaking” holiday sales.
Some of the companies due to deliver earnings in coming weeks include Macy’s (M), which reported a mediocre rise in sales over Q3; Walmart (WMT), which had solid Black Friday sales but has been mum since then, and Target (TGT), which was widely expected to hit it out of the ballpark over the holiday period but instead nearly struck out.
That’s not untypical. It’s important to remember that retailers can have individual issues of their own that don’t reflect the broader industry. And we’ve witnessed a number of shopping center and mall stores go dark in recent years, which in itself could be considered a lagging indicator.
If those overall assorted holiday sales results offer any glimpse into the future of retail, it could be that the shift in consumer shopping habits—causing what appears to be a seismic evolution in the retail industry—looks far from over. That’s been problematic for some retailers playing e-commerce catch-up against online behemoth AMZN.
WMT gets retail earnings season kicked off on Feb. 18.
FIGURE 1: DISCRETIONARY VS. STAPLES. Consumption at the retail level can be roughly categorized into two sectors: Consumer Discretionary (IXY—candlestick) and Consumer Staples (IXR—purple line) or, in other words, "what we want" and "what we need." Note that over the last few months, both sectors have been on a general uptrend. Each had one big down move, but they occurred at different times. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
AMZN’s earnings results, reported late last month, might paint a rosy portrait of the company’s success compared with much of the rest of the sector. But it’s important to remember that AMZN had a running start on one-day and same-day delivery, which is part of the catch-up game. It also has other non-retail forces feeding the beast.
The roughly 21% jump in net sales over the same quarter last year include subscription services to Prime membership, Music Unlimited and Prime Video Channels, which shot up 32% from the year-ago period. “More people joined Prime this quarter than ever before,” AMZN Chief Executive Jeff Bezos said in the earnings release.
AMZN also has a huge technology business. So comparing AMZN to other retailers could be like assessing the differences between ice and water. But there’s little argument that AMZN’s standing in the e-commerce world has pushed other retailers to sharpen their skills.
And that’s one reason why analysts say they have a keen interest in how the digital strategies of retailers that aren’t AMZN played out. Shoppers widely admit they don’t look at retailers in terms of channels; they do as one seamless experience, no matter how and when they purchase items.
Investors also might want to pay close attention to how retailers fared this season with all their omni-channel sales sources like purchasing products in-store, buying online/picking up in store or waiting for delivery. Most big-box retailers were testing the limits on these omni-channel choices for the first time during the busy holiday shopping period. Did the tests meet expectations?
M, which held an investor day Feb. 5, might be considered the poster child for the trials and tribulations many big-box retailers are facing and what they’re doing about it beyond letting triple-digit numbers of stores go dark.
The department-store retailer said it plans to close 125 stores as it reorganizes its operations, mostly Macy’s and Bloomingdale’s stores. The strategy also calls for consolidating offices, including its headquarters, to New York and Atlanta, laying off some 2,000 workers and forking over big bucks while leaving millions of sales on the table over a three-year period to first, stabilize the business, and then, put it back on a growth path to profitability.
It’s also venturing out of the mall with a smaller-format store, targeted primarily for lifestyle centers, with curated Macy’s merchandise as well as a collection of goods and services drawn from the local markets.
The first Market by Macy’s recently opened in Southlake, Texas, an affluent Dallas suburb, with two more planned for Atlanta and Washington, D.C. At about 10,000 square feet, the pilot stores are about one-tenth the size of the typical shopping center and mall stores that were once the primary go-to for Macy’s shoppers.
The stores also will set aside space for all-day food and beverage offerings – yes, you’ll be able to shop with a glass of wine in hand. The company hopes to also attract day workers, kind of like a coffee shop or flexible work space.
M released preliminary holiday-period results that showed sales at stores open at least a year—a key industry metric—slipped 0.7%. At the same time, it said it expects earnings per share for 2019 to be near the upper end of its previous guidance of $2.57 to $2.77. It expects results to improve by 2023.
Competitors like Kohl’s (KSS) and Nordstrom (JWN) are also gearing up to deliver earnings. Like M, they’ve been rethinking their consumer-driven strategies, something investors might want to be listening for details about on earnings calls. KSS has been reworking its stores with new brands and better layouts while also stepping up its relationship with AMZN as a drop-off for returns.
And how is KSS’s Curated by Kohl’s approach working? Chief Executive Michelle Gas said at the Consensus Great Brands Show last fall that KSS was taking a “test and learn” approach to its partnership with Facebook (FB) to identify trendy direct-to-consumer, or DTC brands to bring in store. FB alerts KSS to brands such as Adore Me, Lovepop and Lucca + Danni that are gaining social media popularity on Instagram and Facebook platforms.
Analysts say they’ll be looking for more insight into how JWN’s New York flagship that opened in October performed during that important holiday shopping season. It could be interesting to see if the hype around the opening of the Seattle-based retailer’s first Manhattan flagship helped power sales.
That said, analysts note JWN has been among the department-store retailers that appear to be weathering the changing winds of the industry. Though it, too, has absorbed a gut punch here and there, its foray into bringing innovative ideas to the selling floor has kept some analysts in its corner.
One tactic that analysts said they want more detail on is JWN’s partnership with direct-to-consumer (DTC) brands. JWN is getting a name for itself as one that, like KSS, woos buzzy online brands such as Stella & Dot, the jewelry company, cosmetics maker Glossier, and clothing brands Everland and Reformation to its more sophisticated floors. Might JWN be getting traction to its stores because it’s the only place some DTC brands can be found in physical stores?
TGT Chief Executive Brian Cornell, who was enthusiastic about the discount retailer’s expectations going into the holiday season, called the results a “tough miss” in a blog post in mid-January. “After three strong quarters this year and a record-breaking holiday season in 2018, we had some really ambitious plans heading into the season,” he said.
“While we knew this season was going to be challenging, it was even more challenging than we expected,” he noted. Comparable sales grew 1.4%, thanks mostly to 19% gains in digital sales, but the results fell below guidance. He said the culprits were lackluster sales in electronics and toys.
Both those results were a surprise to many analysts who thought TGT would take market share from others, especially in the toy department since the demise of Toys “R” Us. They did, Cornell said, but not enough to move the arrow.
Investors and analysts say they now want to know how TGT might address the issue. They also want to know whether TGT is positioning itself to tap into Pier 1 Imports’ (PIR) market share after the home goods retailer said it would be closing a number of stores.
Speaking of grabbing market share, analysts widely expect WMT to snap up some of PIR’s lost sales and said they will be listening to how the behemoth of a retailer might attack that.
“With massive stores, huge distribution and the ability to quickly fill in stock, there may be a huge opportunity for the retail giant,” Placer.ai’s Jocelyn Bauer wrote in a recent report.
“This would obviously require a fairly significant shift in how the brand is perceived by this new audience, alongside merchandising challenges,” she added. “However, with a retailer that has proven both innovative and fast-moving, it remains one of the more interesting players to watch.”
WMT has taken a number of aggressive steps to combat AMZN’s penetration but analysts said they worry that its holiday sales, like TGT’s, might miss expectations.
Analysts point to the revolving door in the C-suite, which included departures from the company’s chief merchant in January and its chief e-commerce merchant in December.
U.S. same-store sales at WMT have been consistently moving higher, rising 3.2% in the Q3 amid a 1.3% gain in store traffic. E-commerce, which WMT has invested a lot of dollars in with mixed results still rose 41% in the last quarter. Much of that has been linked to online grocery sales, analysts said. Will there be a repeat of that?
Despite a lot of analyst hoopla toward TGT, WMT and others after scouting stores for Black Friday traffic, TGT’s warning appeared to scare some of them. Morgan Stanley, for one, isn’t betting on WMT’s results, and sliced its comparable-sales forecast to 2% from 2.5% after TGT released its disappointing results.
And Cleveland Research told investors to brace for below-expectations. “Overall holiday sales seemed to come in softer than we were previously expecting, with sales performance during December not appearing as strong compared to peers,” analysts there wrote in a January report.
How that smacks with reality is tough to discern since WMT has given no hint to how it performed during the holidays. Looking at past performances, WMT has reported only one miss on the bottom line in the last 16 quarters. Stay tuned, but, as always, keep in mind that past performance is not an indication of future results.
No retail snapshot, of course, would be complete without a nod to the big boys of do-it-yourself stores. Home Depot (HD) and Lowe’s (LOW) tend to offer some insight into the state of consumer, the industry and the overall economy. Consumers drive three-quarters of the nation’s gross domestic product and when the going is good, they spend more on home improvement in tandem with their spend at the TGTs and WMTs of the world.
And like other retailers, the early readings on quarterly results for HD and LOW appear mixed. HD reported disappointing results in the Q3 in November and trimmed its expected sales gains then for the full year to 1.8% from a previous forecast of a 2.3% gain. On a same-store sales basis, HD lowered that forecast to about 3.5% from 4%.
Besides sales results, analysts said they’ll be listening for updates on HD’s aggressive $11.1 billion investment in digital transformative technology. On the Q3 conference call, Chief Executive Craig Menear acknowledged that the sales results were “below our expectations,” and noted that unwinding the legacy technology “has proven more complex than originally anticipated,” he said.
“Our rollout is largely on track and we are realizing benefits,” he added. “It’s just taking a little longer than our original assumptions.” Is that still the case?
As for LOW, whose sales growth has historically lagged HD’s, analysts are wanting to hear more about the turnaround under Chief Executive Marvin Ellison, who joined the company in July 2018.
Since then, Ellison has taken an ax to underperforming stores, including announcing plans in November to shutter 34 stores in Canada by mid February. LOW’s Q3 earnings also fell short of Wall Street’s bottom-line expectations. Same-store sales rolled in at 2.2% increase while comparable sales in just the home-improvement division were up 3%.
U.S. online sale also ticked up by 3%, which disappointed Ellison in light of an industry standard in double-digits. “It’s not difficult to grow dot-com sales,” he said on the conference call. “It’s difficult to do it correctly.” Analysts say they want to know if HD has figured out how to do it “correctly.”
Analysts also will be listening to updates on HD and LOW’s professional businesses, big-ticket sales, lumber prices and the tariff situation.
When it’s all said and done, we’ll soon get a sense of whether those “missing days” after Thanksgiving last year were a turkey the retail sector couldn’t easily swallow.
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