Retail is still betwixt and between in a COVID-19 world.
Even though the industry is starting to reopen, the comeback is uneven. And while updates from major players such as Walmart Inc., Kohl’s Corp., Urban Outfitters Inc. and Gap Inc. on Tuesday showed how the industry is moving forward, first-quarter results also made clear just how hard apparel retail has been hit.
Walmart stayed open throughout the crisis and logged an 8.6 percent increase in first-quarter revenues, with a 74 percent jump online. Apparel sales at the mass giant still took a big step back, however, falling about 14 percent as consumers stocked up on paper towels, toilet paper, flour and other essential items to stay at home.
The demand curve could be growing more favorable for fashion, though, according to a description of consumer spending during the quarter by Doug McMillon, president and chief executive officer of Walmart.
At first, the world’s largest retailer was selling what normally would be two or three days’ worth of grocery staples and surface cleaners in two or three hours. Then consumers moved on to entertainment, at-home schooling supplies and other staying-home categories such as puzzles, video games, bikes, home office goods and exercise equipment.
But toward the end of the quarter McMillon said consumers began “relief spending,” which was heavily influenced by stimulus dollars from the U.S. government and led to increases in apparel, televisions, sporting goods and toys.
“Discretionary categories really popped toward the end of the quarter,” McMillon said on a conference call with Wall Street analysts.
Of course, Walmart and similar firms were operating from a position of strength during the quarter. While the end-of-quarter trends outlined by McMillon might bode well for the broader sector, most retailers were holding on to survive — and now face a big hole to dig out of. The scale of the challenge has observers predicting more big-name retailers could follow the likes of J.C. Penney Co. Inc., Neiman Marcus Group and J. Crew Group into bankruptcy.
While not on the list of vulnerable companies, Kohl’s Corp. nonetheless saw first-quarter sales fall by over 40 percent and said although half of its store base has opened back up, the doors that are operational are only about 50 to 60 percent as productive as they typically would have been at this time of year.
And Kohl’s is continuing to reshuffle its women’s assortment as it goes, dropping eight brands, including Jennifer Lopez, Dana Buchman and Juicy Couture.
The specialty crowd is also still being hit hard. Urban Outfitters Inc. said its sales fell 31.9 percent in the first quarter, while about 90 percent of Gap Inc.’s stores remain closed. Gap ceo Sonia Syngal admitted at the company’s annual meeting that it would be accelerating its efforts to rationalize its retail fleet, meaning some of those doors might never reopen.
With spring inventory lingering, summer approaching and stores in major markets — including New York City — still closed, retail has become a game of watching the weekly numbers to see how consumers bear up with an unemployment rate of 14.7 percent and a future seemingly dependent on a COVID-19 vaccine that’s still very much in the works.
Weekly sales in the U.S. remain depressed compared with last year, according to The Retail Economist-Goldman Sachs Weekly Chain Store Sales Index, which revealed a year-over-year decline of 16.6 percent for the period ended May 16.
Despite the drop, week-to-week sales are trending slightly up and online sales remain robust across the board, according to data from Emarsys and GoodData.
In the TRE-GS report released Tuesday, Michael P. Niemira, chief economist of The Retail Economist, said week-to-week retail sales rose 1.3 percent. “As states have just begun to loosen their lockdowns, which were due to the COVID-19 pandemic, the pace of spending has improved a tad — though it still remains extremely weak on a year-over-year basis,” he said. “Unfortunately, even at the latest week-over-week sales pace and assuming it can be sustained week after week, it still will take 14 weeks to recover from the pandemic’s impact on chain store sales.”
Here, the latest from companies updating investors on Tuesday.
Walmart Buoyed as Consumer Stock Up
Walmart has found itself fairly essential during the coronavirus lockdown.
The retailer said Tuesday its revenues for the first quarter of 2021 surged to $134.6 billion, an 8.6 percent increase from last year. And as customers ordered more deliveries in quarantine, its e-commerce sales increased 74 percent.
Comparable-store sales rose 10 percent, in response to the demand for food and household consumer products, the company said, and its consolidated operating income for the quarter was $5.2 billion.
Its net income for the three months ending on April 30 was $3.99 billion, a 3.9 percent increase from $3.84 billion for the same time last year. Its adjusted earnings per share were $1.18 for the first quarter. On Tuesday, Walmart shares closed down 2.2 percent to $124.95.
“Our omnichannel strategy, enabling customers to shop in seamless, flexible ways, is built for serving the needs of customers during this crisis and in the future,” Doug McMillon, president and ceo of Walmart, said in a statement.
The company said, however, it is discontinuing the e-commerce start-up Jet.com, which it had acquired in 2016 for $3.3 billion.
“While the brand name may still be used in the future, our resources, people and financials have been dominated by the Walmart brand because it has so much traction,” McMillon said at an earnings call Tuesday with analysts.
“The Jet acquisition was critical to jump-starting the progress we have made the last few years. Not only have we picked up traction with pickup and delivery, but our walmart.com nonfood e-commerce growth accelerated after the arrival of Marc and the [Jet team],” he added, referring to Marc Lore, president and ceo of Walmart U.S. e-commerce, and who had founded jet.com.
On Tuesday, McMillon also broke down customer demand during the pandemic into phases, characterizing their shopping trends as beginning with stocking up. Customer spending shifted more toward entertainment products such as video games, and do-it-yourself projects including making masks that required sewing machines, he said, noting that customers began spending on more discretionary products as they received their stimulus checks.
The Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, which passed in late March, had provided for onetime payments of around $1,200 a person, depending on their income.
“We experienced unprecedented demand in categories like paper goods, surface cleaners and grocery staples,” he said on the call.
“For many of these items, we were selling in two or three hours what we normally sell in two or three days,” he said.
The increase in demand also highlighted the retailer’s need for more capacity, company executives said, pointing out that the company had begun fulfilling orders through some 2,500 of its stores.
But the company also said it bore almost $900 million in costs related to the COVID-19 crisis. As Walmart stores, deemed essential during the pandemic, stayed open and demand for groceries and essentials surged, the retailer had previously signaled its plans to hire more than 150,000 workers, including warehouse and distribution staff. On Tuesday, it said it had hired more than 235,000 new associates in the U.S.
Amid reports of Walmart store employees testing positive for COVID-19, and as associates are themselves tasked with sanitizing stores, the retailer has made gestures at compensating its staff. Since March, the company has announced bonuses, as well as a $2-an-hour raise for fulfillment center workers until Memorial Day, putting the starting pay for fulfillment center workers in the range of $15 to $19 for the duration.
In March, the company said it was issuing a first round of “special” bonuses to its hourly workers in the U.S., or $300 for full-time hourly associates and $150 for part-time hourly associates. It also said at the time it would speed up its scheduled quarterly bonus for its hourly workers, doling those out in April. Combined, those bonuses totaled almost $550 million, according to the company.
Last week, Walmart revealed plans to issue another bonus to its hourly workers in the U.S., again paying $300 for full-time hourly associates and $150 for part-time hourly and temporary associates. Those bonuses would amount to $390 million, according to the company. The roughly $940 million in bonuses amounts to about 23 percent of the retailer’s $4.14 billion in net income in its fourth quarter ended Jan. 31.
“More than ever, the news this quarter is our amazing associates,” McMillon said in his statement. “They are rising to the challenge to serve our customers and our communities.”
The retailer’s executives said their focus now was to replenish its stocks, in light of inventory being down by about 8 percent at the end of the quarter, due to demand.
The company is also planning the reopening of services that were shut down during the pandemic, including its auto care and optical centers, according to John Furner who, as president and ceo of Walmart U.S., oversees more than 4,700 stores and one million associates, according to Walmart’s web site.
“We’re doing those reopenings in a few of those in limited spots this week to learn how to best give that service back to our customers,” Furner said on the conference call.
The company’s performance was received well by analysts Tuesday, who lauded its investments in e-commerce.
“Walmart’s Q1 results illuminate the impact of the coronavirus on the U.S. consumer, providing insight into the shift in product mix away from discretionary items toward food and consumables, as well as the surge in online, with up 74 percent on a base of over $20 billion reflective of increasing comfort of consumers, borne out of necessity, with this channel,” said Moody’s lead Walmart analyst Charlie O’Shea, in a statement.
Kohl’s Posts $541 Million Loss
Kohl’s Corp. is taking the next step and starting to reopen after the coronavirus shutdown — but much has changed.
“We expect we’ll be operating differently for quite some time, but we are pleased that we have now begun the rebuilding process,” said Michelle Gass, ceo, on a conference call with Wall Street analysts.
The off-mall retailer now has about half of its more than 1,100 stores open, but social distancing exacted a heavy toll on the first quarter.
Kohl’s net losses tallied $541 million, or $3.50 a share, as sales for the three months ended May 2 dropped 40.6 percent to $2.4 billion. A year earlier, the off-mall retailer posted earnings of $62 million on sales of $4.1 billion. Its stock closed down 1.4 percent on Tuesday to $17.38.
The retailer closed all of its stores on March 20 and ultimately furloughed 85,000 associates.
As stores reopen, only a portion of the business has returned and the future remains murky.
Gass said: “What I can tell you is that as the stores have been opening, they’ve been doing 50 percent to 60 percent of productivity that we would typically see at this point in time. So there are customers in our stores, and we’re happy about that.…As it relates to the balance of the year, I mean, we are planning the business very conservatively. We are in a very uncertain time. There’s a lot that could unfold in the coming months. So we’re taking a very prudent approach to how we’re planning inventory, how we’re planning expenses to navigate through the balance of the year.”
Inventory receipts for the second quarter have been lowered by 60 percent.
But Gass said Kohl’s was able to make some gains online as shoppers stayed home.
Kohl’s digital sales increased 24 percent in the quarter and accelerated to 60 percent growth last month.
“Our stores fulfilled a higher percentage of digital orders, which aided our efforts to reduce in-store inventory,” Gass said. “More than 40 percent of digital orders were fulfilled by ship-from-store and customer pickup during the first quarter.”
But it was home goods that were Kohl’s big online draw although active, beauty, intimates and sleepwear also showed strength. Apparel and footwear lagged overall growth.
Gass said the company’s reinvention of its women’s area would continue.
“While the current environment will pose challenges, we are moving forward with several bold moves. We will exit eight down-trending women’s private brands. These include Dana Buchman, Jennifer Lopez, Mudd, Candies, Rock and Republic, Popsugar, Elle and Juicy Couture.”
At the same time the company is adding brands, including Lands’ End and Toms, while continuing to focus on active and beauty.
Kohl’s has taken numerous steps to hold on to its cash and maintain financial flexibility in light of the crisis. The company is keeping inventory receipts “meaningfully lower”; reduced expenses with cuts to marketing, technology, operations and payroll; cut capital expenditures by $500 million, and suspended its share repurchase program and dividend.
The retailer was also able to tap into the financial markets and replaced and increased the size of its revolving loan facility to $1.5 billion and issuing $600 million in bonds due in 2025. Kohl’s, which started the year with $700 in cash on its books, ended the quarter with $2 billion as it built more financial cushion to see it through the future.
But even after COVID-19 passes, some things might never be the same again.
“We are taking the opportunity to take a step back and look at our business,” Gass said. “I think there’s some tactical changes we’re making. So if you go and visit the store, you’ll see we’ve cleared out spaces like our racetrack design, where we’ve removed a lot of the impulse areas to create more space. And we actually believe it’s creating a better shopping experience for the customer.”
The coronavirus weighed heavily on Urban Outfitters Inc. in the first quarter.
The teen retailer, parent company to the Urban Outfitters, Anthropologie, Free People, Terrain and Bhldn brands, in addition to rental subscription service Nuuly and a food and beverage business, posted a quarterly net loss of $138 million Tuesday afternoon, causing shares to slide by more than 5 percent in after-hours trading. The company said the results were preliminary as they include provisional impairment expense and the corresponding tax effects.
“The world has certainly changed since we last spoke,” Richard Hayne, chief executive officer of Urban Outfitters, said on a conference call with analysts. “No fashion retailer is immune to the effects of COVID-19. Our company entered the quarter with strong comps across all three brands. We thought we were on our way to deliver outstanding quarterly results. [But] with our stores closed and our e-commerce business facing many returns, our outstanding quarter quickly became an exercise in crisis management.”
Total sales for the three-month period ending April 30, 2020, fell 31.9 percent to $588 million, down from $864 million the same time last year. The $138 million profit loss was also a noticeable contrast from last year’s gains of $32.5 million.
By brand, Anthropologie fared the worst, with revenues just $234 million during the quarter, compared with $355 million last year. Sales at Urban Outfitters — the company’s largest brand — were $237 million for the three-month period, down from $316 million last year, while Free People’s sales were $107 million, down from $186 million.
Wholesale segment sales also fell, by 74 percent, while comparable retail sales decreased 28 percent year-over-year. The results were partially offset by low double-digit growth in the company’s digital channels.
Shares of Urban Outfitters closed down 4.5 percent to $17.93 in regular trading.
“I am incredibly proud of our teams for their hard work, dedication and resilience over the last two months,” Hayne said in his prepared remarks. “The actions we’ve taken during the quarter to strengthen our balance sheet and help preserve liquidity provides us with financial flexibility during this difficult period. I’m confident our proven ability to execute our multichannel, multibrand, and multicategory strategy will ensure our future success.”
Urban Outfitters was one of the first retailers to announce store closures — in the second week of March — to help contain the spread of the coronavirus. The company later furloughed some associates on April 1 for a period of 60 days to help curb costs.
As of Tuesday, about 40 percent of the company’s store fleet — or 252 stores across 25 states and roughly 40 stores in Europe — have reopened. The company hopes to have another 100 locations open by the first week of June.
The stores that are open offer curbside pickup or limited in-store shopping with increased safety measures, such as mandatory face masks for employees, hand sanitizers in stores and limits on how many people can be in stores at once.
Hayne added on the call that in-store traffic continues “creeping up” each week with categories like home and lounge over performing. In addition, Urban Outfitter’s new customer count is up over 60 percent.
Even so, with stores closed at least part of the current quarter, the company is expecting comps to be down by more than 60 percent.
“There is nothing but uncertainty as we look forward to the second quarter,” Frank Conforti, chief financial officer at Urban Outfitter, said on the conference call.
Meanwhile, with last quarter’s store closures, some occupancy expenses were deleveraged. But rent remains unadjusted until agreements can be reached with landlords, according to the company. The firm also had a $43.3 million year-over-year increase in inventory obsolescence reserves because of excess inventory and an increased promotional environment. Delivery expenses also increased with added penetration in the digital channel.
“Across brands, the company is firing on all cylinders to clear merchandise through the online channel,” Jen Redding, an analyst at Wedbush, wrote in a note.
The company’s store fleet is made up of roughly 625 stores across North America and Europe. In March, the retailer said it has plans to open about three dozen more stores, across its three major brands, in the coming year. Many of those stores were set to open in secondary markets, which tend to be more lucrative for the company. In addition, store openings often lead to a halo effect, luring shoppers to buy more online after visiting stores.
“While we expect the [near term] to be challenging (more so for Anthro than Urban Outfitters), we believe Urban has executed well in addressing challenges from COVID[-19], with significant expense/capex cuts and a pivot to ‘stay-at-home’ appropriate assortments,” Janine Stichter, equity analyst at Jefferies, wrote in a note. “With a solid balance sheet, [about] 40 percent of the business online, and only [about] a third of the fleet in traditional malls, we view Urban as one of the better-positioned retailers over the medium term.”
Gap Vague on Plans to Reopen at Annual Meeting
Gap is keeping communications with investors relatively vague.
In a brief annual meeting with shareholders, which it webcast in a rare move, chairman Bobby Martin called the coronavirus pandemic and resulting closure of most nonessential retail business for the last two months “one of the worst crises this industry has ever seen.” Yet the company offered little insight into exactly how it’s been impacted or how it plans to cope in the months to come.
“While the effects of the pandemic will continue for some time…the company is taking the right steps to emerge for the future,” was all Martin allowed. He also praised new ceo Sonia Syngal, who took up the role from Art Peck about a week after most stores in the U.S. were ordered closed to limit spread of the virus, calling her leadership of the company “admirable and confident.”
As for Syngal, she kept her comments upbeat but vague, although she did note that 90 percent of Gap’s store fleet across its seven brands remain closed. She made no mention of plans revealed about two weeks ago to have 800 stores reopened this month. Nor did she address other attempts to cut costs, like its ongoing decision to not pay rent and the potential legal repercussions of that.
“I’m certain it’s not lost on anyone how much has changed since our last annual meeting,” Syngal said.
She went on to note that while nearly all stores remain closed and Gap has permanently reduced headcount in corporate roles globally while furloughing nearly all retail employees, “we’ve moved faster and more united as an organization than we have in years.”
Syngal added that the pandemic is also forcing Gap to attempt to “embrace the opportunity from this crisis” by “accelerating much needed change,” including the rationalization of its store fleet and the scaling of e-commerce. As retail experts have already predicted, Gap is among the many retailers likely to not reopen hundreds of stores that are currently closed as leases expire.
“We know the retail landscape will look different,” Syngal said during the investor meeting.
Gap’s shares closed down 2.7 percent to $7.61 on Tuesday.
As for those stores that do reopen, Syngal said Gap brands, which include Old Navy, Banana Republic and Janie and Jack, are “ready to help shape the gold standard for opening safely,” although she shared no specifics on how the company intends to do that.
Syngal said she visited over Mother’s Day weekend retail locations in Texas that were able to reopen as that state decided to unlock its economy much quicker than others. She called her visits “energizing.”
“Gap has weathered many storms over 50 years,” Syngal said, “And we’re among the companies positioned to emerge from this and thrive.”