Urban Outfitters Inc. and Dillard’s Inc. added new dimension to the pain retailers are feeling as they trudge into the holiday season.
Both retailers weighed in Monday with what their top executives described as “disappointing” results for the third quarter, following weakness seen last week in results from Macy’s and Nordstrom.
On a conference call with analysts, Richard Hayne, chief executive officer of Urban Outfitters, gave a very digital answer to the question on everyone’s mind: What’s happened to retail?
“It is obvious that the environment around apparel retailing over the past year has been challenging,” Hayne said. “Many brands have struggled, a few have delivered fair results and very, very few have showed strength.”
Hayne said his company’s Anthropologie and Free People businesses have been strong, but the Urban unit has struggled. (The company revealed on the call that the store growth for the Urban nameplate would slow in North America and Europe.)
“Clearly, the consumer’s growing affinity for direct-to-consumer shopping has somewhat tempered her need to shop in stores,” he said. “Physical shopping trips, particularly to undifferentiated malls, are becoming less frequent. D-t-c is more efficient, it allows her to browse more products from many different sources…see outfits and styling more clearly and engage others as part of a social network. She is willing to pay for these advantages.”
That puts the pressure on traditional retailing.
“It raises the bar for bricks-and-mortar stores,” Hayne said. “The store experience must become the performance, with the energy and precision of a Broadway play. We must permeate the store with creativity and offer services when and to the degree the customer wants it….I see this as an exciting opportunity to reinvent the store.”
Earlier in the day, Hayne showed how willing he was to take new approaches when Urban Outfitters said it was acquiring a pizza chain called Pizzeria Vetri. Restaurant sales have been steadily increasing as consumers have been more inclined to spend money eating out as opposed to buying more apparel.
Hayne might be thinking deep thoughts about the future of retail and fashion, but the results for the third-quarter so far show that retailers are more immediately facing a tough holiday season.
Urban’s third-quarter profits gained 10.3 percent to $52 million, or 42 cents a share, but revenues only inched up 1.3 percent to $825.3 million — almost $47 million shy of analysts’ expectations.
Before Urban reported after the market closed, Dillard’s earlier in the day revealed its profits dropped 17.2 percent to $45.7 million, or $1.19 a diluted share, while revenues slipped 1.8 percent to $1.47 billion. Wall Street punished both retailers, with Urban’s stock falling 11 percent to $20.15 in after-hours trading, on top of a 7.4 percent drop during business hours. Dillard’s shares declined 6.4 percent to $72.52.
They aren’t alone. Since the beginning of November, the S&P Retail ETF has declined 9 percent in value as retailers have been delivering weak third-quarter results. To make matters worse, they haven’t been exactly enthusiastic about the upcoming holiday season.
More data that supports a less-than-stellar retail holiday is the collapse of imports at the top three ports in the U.S. According to Zepol import data of 20-foot containers, last year’s increase in imports from August to September was 1.86 percent. This year, imports plunged 4.2 percent from August to September, although September 2015 imports were higher than September 2014 imports. Normally this number rises as retailers build up inventory for the holiday season.
The first round of earnings from the major department store chains showed that warm weather was hurting sales for fall and retailers have been forced to increase promotions as a way to spur shopping. Budget conscious shoppers benefited discount department stores like J.C. Penney and Kohl’s. Both of those companies surprised investors with improving sales in the latest quarter.
Retail chains with prices more in the mid-tier level, such as Macy’s Inc. and Gap Inc., both took a spill. Macy’s found its tourist dependent stores got hurt by the strong dollar and The Gap Inc. saw sales fall at Banana Republic, but shine at the low-priced Old Navy chain.
Even Nordstrom seemed at a loss to explain why its normally resilient shopper vanished during the quarter. The company’s total revenue grew 6 percent, but its net income declined 43 percent.
This week brings even more retail earnings — and either a clearer picture of what lies ahead for holiday, or more murkiness.
Wal-Mart Stores Inc., TJX Cos. Inc. and Dicks Sporting Goods will report their earnings Tuesday before the market opens. The FactSet estimate for third-quarter earnings at Wal-Mart is 98 cents a share and $118 billion in sales, which is a 1 percent drop from last year. Most analysts have a hold rating on the stock and since it has been on a downward trajectory since January, that appears to have been good advice.
TJX delivered a positive earnings surprise last quarter and has beaten analysts’ estimates in three of the trailing four quarters. Value-oriented consumers who have saved money at the gas pump are willing to spend those savings, but they want brand names at bargain prices. This trend is benefiting TJX.
Dick’s has done well from the ath-leisure trend and that looks to be continuing. The company has raised its outlook for 2015 and gave very optimistic guidance for the third quarter.
Wednesday brings earnings from Target and lingerie behemoth L Brands, parent of Victoria’s Secret. Target’s sales are expected to increase over the previous quarter, but the earnings per share are estimated to drop sequentially. Target could benefit from “Star Wars”-inspired toys and electronic sales as the warm weather more than likely hurt apparel sales. L Brands stock bounced back from August lows only to begin sliding again as other retailers warned of slowing sales. As the competition has gotten pressured, they have been very promotional and that could hurt L Brands.
Thursday is an even bigger day, with numbers coming out from Stein Mart, Stage Stores, Perry Ellis, Bon-Ton Stores and Ross Stores. Stein Mart already said its October sales decreased 1 percent, so there aren’t high expectations there. Perry Ellis’ stock has slid most of the year and investors have increased the selling as of late. Stage Stores and Bon-Ton are both closing stores to right size. Ross Stores could benefit as the value shopper keeps spending their gas savings.
Friday wraps up with Abercrombie & Fitch’s third-quarter earnings. Abercrombie has been trying to get away from its sexy image and branded logo clothes that Millennials no longer find appealing. The FactSet estimate is for 22 cents in EPS, an increase over last quarter, but about half of what it was last year. Sales are expected to be $865 million, also better than last quarter, but worse than last year.
The holidays don’t get canceled and people still shop, but where they spend their dollars is creating a clear line between the winners and losers. The high-end consumer seems to be buying iPhones and Go Pros, not scarves and sweaters. The budget conscious shopper wants brand names at bargain basement prices. Spending money at restaurants seems to be the one thing that everyone agrees upon.