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Mar 09, 2024

EXEC: Department Stores Stung by Apparel Category Woes

Posted by Thomas J. Ryan | Aug 28, 2023 | Exec Apparel, Exec Footwear, Exec Outdoor, Exec Sports/Fitness, Feature, SGB Executive Macy’s, Nordstrom, Kohl’s, and Dillard’s saw sales decline in the

Posted by Thomas J. Ryan | Aug 28, 2023 | Exec Apparel, Exec Footwear, Exec Outdoor, Exec Sports/Fitness, Feature, SGB Executive

Macy’s, Nordstrom, Kohl’s, and Dillard’s saw sales decline in the second quarter as the retailer’s core apparel category faced promotional pressures and weak demand. The active category was a bright spot for Nordstrom, but continued to struggle at Macy’s and Kohl’s.

All major U.S. department stores still surpassed Wall Street’s expectations during the quarter as the bar was set low with the apparel weakness evident in 2022 amid bloated inventories across the marketplace and softening demand from escalating inflation and rising interest rates. However, none of the retailers were emboldened enough to raise their outlook for the year as the pullback in discretionary spending threatens the crucial holiday shopping season.

Macy’s and Nordstrom flagged delays in store credit card repayments as a sign of the strained consumer.

Macy’s Double-Downs On Cautious Outlook Macy’s, the nation’s largest department store retailer, saw second-quarter results exceed Wall Street’s sales and profit expectations. However, shares fell 14 percent the day it released its earnings as executives were cautious in the second half and declined to change their conservative guidance.

The retailer cut the forecast in early June after seeing sales weaken in the spring, including at its higher-end chain, Bloomingdale’s, and beauty chain Bluemercury.

Sales fell 8.4 percent in the second quarter to $5.13 billion, topping consensus guidance of $5.09 billion. Comparable sales on an owned-plus-licensed basis dropped 7.3 percent, with sales down 8.2 percent at the Macy’s banner and 2.6 percent at Bloomingdale’s.

At the flagship Macy’s banner, top performing categories included beauty, especially fragrance and high-end cosmetics, women’s career sportswear and men’s tailored clothing, said Jeff Gennette, chairman and CEO, on an analyst call. Continued improvements came from soft home categories, including textiles and housewares. Active, casual and sleepwear remained challenged. However, Gennette said that in the near term, active should benefit from the reintroduction of Nike men’s, women’s, and kids online and in 75 Macy’s doors in October and the rollout of the brand to more than 200 doors this spring. Nike footwear is available in-store at Macy’s through Finish Line in-store shops.

Gennette also announced that select Under Armour men’s products would be available in 150 Macy’s stores and online beginning in February. He said, “The return of Nike and Under Armour speaks to the strength and reach of Macy’s and our ability to attract sought-after wholesale partners.”

Macy’s posted a loss of $22 million, or 8 cents per share, in the quarter after a settlement charge related to the transfer of pension obligations.

Excluding non-recurring charges in both periods, earnings fell 74.4 percent to $71 million, or 26 cents a share, but topped analysts’ consensus target of 13 cents.

Gross margins eroded 80 basis points to 38.1 percent due to heightened clearance markdowns and promotions to clear through spring seasonal product.

Inventories at the quarter’s end were down 10 percent year-over-year and down 18 percent to 2019, reflecting ongoing disciplined inventory management and the clearance of excess spring seasonal product.

For the full year, the guidance calls for same-store sales, including licensed departments, to decline in the range of 7.5 percent to 6 percent. On an adjusted basis, EPS is expected in the range of $2.70 to $3.20, down 34.2 percent at the midpoint against $4.48 a year ago.

“As we plan the remainder of the year and think about 2024, we remain cautious on the pressures impacting our customer, especially at Macy’s where roughly 50 percent of the identified customers have an average household income of $75,000 or under,” said Gennette. “Over the last several quarters, we have seen the Macy’s customer more aggressively pull back on spend in our discretionary categories. They are not converting as easily and are becoming more intentional in allocating their disposable income with an ongoing shift to services and experiences. We cannot predict when macro pressures will ease and are focused on controlling what we can control. However, we believe our strong balance sheet, continued discipline approach to inventories, and fortification of fundamentals position us well.”

Nordstrom Sees Q3 Sales Trends WeakenNordstrom, similar to Macy’s, saw sales and earnings top analyst targets but, similar to Macy’s, did not raise its guidance as it saw early third-quarter sales decelerate. The retailer also caught widespread attention for a warning about record retail theft.

“Losses from theft are at historical highs,” Nordstrom CEO Erik Nordstrom said on an analyst call late Thursday. “And I’d say we find it unacceptable, and it needs to be addressed.”

Shares lost 7.7 percent of their value trading on Friday on the New York Stock Exchange.

In the second quarter, sales declined 8.3 percent to $3.66 billion, better than the $3.61 billion expected by analysts and improving sequentially from the first quarter decrease of 11.6 percent. Sales decreased 10.1 percent at the Nordstrom banner and 4.1 percent at Nordstrom Rack.

Nordstrom attributed the overall decline to the timing of its Anniversary Sale, which pulled one week into the third quarter from the second. The company also wound down its Canadian operations during the quarter. Without these two impacts, sales would have fallen nearly 4 percent.

Among categories, the active category was a highlight, up low-single-digits from last year, driven by active footwear. President and chief brand officer Pete Nordstrom said on the call, “Customers responded well to new offerings and selections from brands Hoka, On Running, New Balance, and Nike.”

Overall, most categories improved sequentially from the first quarter in year-over-year trends. Beauty was also up low-single-digits and performing relatively well at both banners.

Kids and men’s apparel performed better than average, while women’s apparel performed lower than average. More formal and tailored looks with contemporary brands, including Veronica Beard, Vince and Theory, performed well within men’s and women’s apparel at the Nordstrom banner. As anticipated, designer sales at the Nordstrom banner were weak.

Earnings improved 8.7 percent to $137 million, or 84 cents a share, well ahead of analysts’ consensus target of 44 cents. Gross margins at 35.0 percent decreased 20 basis points primarily due to deleverage on lower sales, partially offset by lower buying and occupancy costs.

Ending inventory was down 17.5 percent, reflecting continued strong discipline.

Despite its second-quarter outperformance, the company reiterated its 2023 outlook as sales weakened in the third quarter and discretionary spending remains soft. For the year, Nordstrom expects retail sales and credit card revenues to drop between 4 percent and 6 percent compared to last year. Adjusted EPS is projected to range between $1.80 and $2.20, excluding charges related to the wind-down of its Canadian business, compared to $1.69 a year ago.

“We continue to see a cautious consumer, and it remains to be seen how changes in inflation and higher interest rates will affect discretionary consumer spending in the second half of the year, particularly during the holiday season. On the call, “we saw sequential top-line improvement in the second quarter,” said Cathy Smith, CFO. “In the third quarter, sales trends have decelerated at both banners. We expect to make continued progress on our key priorities, which will help improve our profitability and mitigate inflationary cost pressures.”

Kohl’s Sees Nike And Under Armour OutperformKohl’s earnings and sales in the second quarter were lower than year-ago levels, but sales were in line with plan, and profits exceeded expectations due to tight expense and inventory controls. Kohl’s maintained its outlook for the year.

Sales fell 4.8 percent year-over-year to $3.7 billion, matching Wall Street’s consensus estimate. Comparable sales were down 5.0 percent.

Among categories, same-store sales in beauty gained greater than 20 percent in the Sephora shops opened in 2021 and 2022, although the home category showed the most improvement versus Q1. Top-performing national brands included Nike, Under Armour, Hager, Izod, Hurley, and Eddie Bauer; however, apparel overall was the weakest major category. Footwear showed trend improvement, partly driven by increased Nike and Under Armour sales.

Net income fell 59.4 percent to $58 million, or 52 cents a share, surpassing Wall Street’s consensus estimate of 24 cents.

Q2 gross margin was 39.0 percent, a decline of 61 basis points to last year, driven by product cost inflation and higher shrink, offset partially by lower freight expense and digital-related cost of shipping.

Inventory at the quarter’s end was $3.5 billion, a decrease of 14 percent year-over-year, exceeding Kohl’s goal of planning inventory down mid-single digits.

On Kohl’s second-quarter analyst call, Tom Kingsbury, CEO, said quarterly earnings aligned with internal expectations as progress continues in its turnaround efforts. He said, “We are confident our strategies will drive sales and earnings performance. It will take some time for the full impact of our efforts to be realized; however, our objective is to show incremental improvement in the back half of the year with even more benefit in 2024 and beyond.”

The turnaround plan simplifies its value messaging, emphasizing “key-value items” and consistent pricing, emphasizing more casual and career looks and exploring newer opportunities in home, gifting, pet, and impulse items. The category shifts resulted in a slight deemphasis of active assortments after the category had expanded in recent years.

Kingsbury told analysts that apparel “remains an important piece of our business. While trends in the overall active space remain soft, we are focused on building on our recent success in outdoor and golf apparel while also working with our national brand partners to bring in newness. In the second quarter, we were pleased with the sales trends in our Eddie Bauer offering in outdoor, as well as in Nike and Under Armour footwear.”

Kohl’s reiterated its outlook for the year that calls for sales to decrease in the range of 2 percent to 4 percent and pro-forma EPS in the range of $2.10 to $2.70 compared to a loss of 15 cents in 2022. Said Kingsbury, “The macro environment continues to be challenging for our customer. That’s why we’re focused on delivering as much value as possible because that customer has less money to spend.”

Dillard’s Squeezed By Promotional Pressures In ApparelDillard’s earnings were down in the second quarter due to markdown pressures in the apparel category; however, a sales pickup in the latter part of the quarter and tight inventory controls helped the Southwest department store chain beat Wall Street targets.

Dillard’s CEO William T. Dillard, II stated, “The cautious consumer we noted in the first quarter continued in the first few weeks of the second, leading to a sales decline of 3 percent. We exited the quarter with inventory flat year over year while maintaining a strong retail gross margin of 40.4 percent.”

Total revenues, including Dillard’s construction business, were down 1.4 percent in the quarter, to $1.57 billion, topping analysts’ consensus estimate of $1.53 billion. Retail sales were down 3.5 percent to $1.5 billion, with same-store sales down 3 percent. Cosmetics was the strongest performing category, followed by home and furniture. In ladies, the weakest categories were accessories, lingerie, apparel, and shoes.

Earnings declined 19.5 percent to $131.5 million, or $7.98 per share, beating Wall Street’s consensus estimate of $4.21. Retail gross margin was reduced by 110 basis points to 40.4 percent. Gross margins increased significantly in home and furniture and moderately in ladies’ accessories and lingerie while decreasing moderately in juniors’ and children’s apparel and significantly in men’s apparel and accessories.

Dillard’s does not hold quarterly analyst calls or provide guidance.

Photo courtesy Nordstrom

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