With another major earnings week underway, the biggest names in retail continue to grab the most attention, albeit for quite contradictory reasons:
- Walmart was a big winner despite its internal struggle over high e-Commerce losses;
- Department stores such as Macy’s, Kohl’s and JCPenney still haven’t shown significant signs of growth even as partnerships and investments ramp up; and
- Current and looming Chinese tariffs continue to put worry lines on the faces of department store and apparel retail executives.
Walmart reported a 37% increase in e-Commerce sales, along with a total revenue increase of 2.9% to $131.7 billion, while same-store sales jumped 2.8%.The average ticket was up 2.2%, better than a 1.8% increase a year ago. Adjusted earnings per share (EPS) was $1.27, outperforming the $1.22 initially forecast by Refinitiv.
Some of the best news for Walmart comes in what to expect down the line. For the remainder of the fiscal year, Walmart now forecasts an adjusted EPS to range between “a slight decrease to a slight increase,” an improvement compared with a prior forecast that was calling for “a low-single-digit percentage” decline.
“This is a bold statement from Walmart,” said Jharonne Martis, Director of Consumer Research at Refinitiv in an interview with Retail TouchPoints. In general, “retailers are telling us not to expect too much from them for Q3. To date (Aug. 19), we have received 19 negative Q3 guidance pre-announcements and only seven positive, so the fact that Walmart is doing it in such a time of uncertainty definitely underlines the strength of the retailer.”
Net income for Walmart rose to $3.61 billion compared with a net loss of $861 million a year earlier, illustrating that even though the company reportedly is taking massive losses in its digital division this year and making significant investments across its supply chain and e-Commerce initiatives, it is still making plenty of money overall.
“Walmart continues to tactically grow market share as evidenced by increased margins,” said Charlie O’Shea, VP and Lead Retail Analyst at Moody’s in commentary provided to Retail TouchPoints. “With guidance for the second half raised, and the competitive landscape in the U.S. continuing to favor size and strength, we expect Walmart to continue to be one of the pacesetters in retail, with continued share growth benefitting from its next day delivery effort, which is rolling out at a breakneck pace, now covering 75% of U.S. households.”
Department Stores Continue To Slide: Is This Their ‘Kodak’ Moment?
Walmart’s very strong quarter has come to be more or less expected. Another recurring feature of quarterly earnings reports: continued weakness in department stores. Prior to the earnings result announcements, Refinitiv estimated that the department store category altogether would see an average 1.3% dip in same-store sales for the quarter.
“You buy discounters, and you sell department stores,” said Boris Schlossberg, Managing Director at BK Asset Management said on CNBC’s “Trading Nation.” “Department stores are actually having a ‘Kodak’ moment, and not in a very good way. They’re getting completely disintermediated as we go forward.”
Macy’s net sales fell 0.5% to $5.55 billion in Q2, with same-store sales increasing by a paltry 0.3% across all owned and licensed locations. Net income dropped to $86 million, or 28 cents per share, from $166 million,or 53 cents per share for the same period a year ago. Refinitiv had expected Macy’s to earn net income of 45 cents per share.
Macy’s kept its sales guidance for the remainder of the year unchanged. However, the company lowered its earnings guidance; the retailer is now expecting its fiscal 2019 earnings per share to be in the range of $2.85 to $3.05 compared to its previous forecast of $3.05 to $3.25.
"Department stores continue to be challenged in their effort to stabilize operating margins,” said Christina Boni, VP and Senior Credit Officer at Moody's in commentary provided to Retail TouchPoints. “Although Macy’s comp sales remained positive at 0.3%, Q2 performance was clearly disappointing, as operating income declined approximately 50%. Inventory clearance pressured Macy’s gross margins despite management of expenses. Total inventories were up only 1.5% at the end of the quarter, which suggests that Macy’s should be better positioned to enter the fall season.”
While Kohl’s has turned a lot of heads with its Amazon returns initiative and recent “Curated by Kohl’s” partnership with Facebook, the department store still saw Q2 same-store sales drop 2.9%, a bigger drop than the 2.5% that had been forecast by Refinitiv. The retailer also saw a drop in net income, from $292 million to $241 million, and saw overall sales drop 3.3% to $4.17 billion.
JCPenneyreported a whopping 9% same-store sales decline, well below an expected decline of 5.2%, on top of total Q2 revenue declines of 7.4% to $2.62 billion. The one silver lining (from a certain point of view) for the company is that its net loss of $48 million is half that of its $101 million loss last year. But the company clearly has a long way to go; earlier in August, the department store received notice that it was at risk of being delisted from the New York Stock Exchange. Its stock fell below $1 on July 19 and has been trading below that level ever since.
Looming Tariffs Spell Uncertainty For Department, Apparel Retailers Ahead Of Holiday Season
As if department stores don’t have enough trouble to deal with, the continuing trade war between the U.S. and China is doing them no favors. Although the Trump administration is postponing the 10% tariffs on $160 billion in Chinese goods until Dec. 15 — including those on popular consumer items such as cellphones, laptop computers, video game consoles, computer monitors and some toys, shoes and clothing —retailers still must deal with uncomfortably high levels of uncertainty as they prepare for the holiday season.
“Macy’s CEO Jeff Gennette said it very clear last week that customers have no appetite for higher prices, and that is very evident in the results we’ve seen so far in earnings,” said Refinitiv’s Martis. “If the tariffs were to be passed on and if retailers have to tack on those prices for the consumer, that might be devastating for the weak-performing retailers. In a study where we looked at some of the retailers that are more vulnerable to the tariffs due to more products manufactured in China, it’s evident that all five department stores — Macy’s, Kohl’s, JCPenney, Nordstrom and Dillard’s — would be hurt the most if hit by higher prices due to tariffs.”
On the other hand, Walmart, Ross Stores and TJX are all built to best handle this, particularly since Walmart sources less than 10% of items from China, and shoppers that remain interested in lower prices will continue to gravitate to off-price retailers.
Still, any retailer stocking Chinese-made items has good reason for concern. As recently as 2018, China was still a dominant supplier of apparel and footwear to the U.S. China accounted for 33% of global apparel imports to the U.S., while footwear accounted for 53%, according to the U.S. Department of Commerce. With the tariffs having such a major impact on these products, retailers’ toughest challenge this holiday season will be in determining the right amount of inventory they should carry.
“A good proxy for them is going to be back-to-school, because parents will have to spend money for their children,” Martis said. “That’s going to give them a good idea as far as how much a consumer is willing to spend, and how much they should really adjust their inventory levels accordingly. How much merchandise should we have for the holiday season given the fact that there might be Chinese tariffs that will be implemented in the beginning of December?”