The phrase “retail apocalypse” definitely has sparked a lot of industry chatter in 2017, as many companies declare bankruptcy and shutter stores. But recently released Q3 financial results reveal that many major retailers have performed above expectations, providing a positive note leading into the holiday season.
Walmart, Target, Best Buy, The Home Depot, Gap, Ross Stores, Williams Sonoma and even Abercrombie & Fitch all posted positive Q3 comparable store sales figures in the past week. And while questions have been raised about the relevance of the same-store sales metric in an age when the lines between online and in-store shopping continue to blur, they are still indicative of a retailer’s ability to convert store visitors into purchasers.
Michael Dart, a partner in A.T. Kearney’s Consumer Products & Retail Practice, noted that many of these retailers, especially the big box brands, have vastly improved on their ability to create convenience, compete on price and provide services that add value.
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“For example, Best Buy has done a great job of matching all online pricing,” Dart said in an interview with Retail TouchPoints. “They bit the bullet and said, ‘You’re not going to find this cheaper anywhere else, and if you do, we’ll match that.’ That’s a bold move, but one that has kept them relevant in front of the customer so they can shop in front of that channel. Secondly, they’ve done a great job partnering with vendors and leasing space to present the merchandise and the products in a much more effective, engaging fashion for the consumer.”
Hurricanes Help Home Improvement Sector
The Home Depot’s continued growth should be a surprise to no one, especially in the wake of a major hurricane season that increased product demand. The retailer saw a whopping 7.9% same-store sales growth, with profit rising to $1.84 earnings per share, outperforming Wall Street estimates ($1.81).
“According to the results of our monthly consumer survey, both Home Depot and Lowe’s led all other home improvement retailers in the percentage of individuals who have shopped at these locations over the past 30 days,” said Chuck Grom, a Senior Retail Analyst at Gordon Haskett Research Advisors in commentary provided to Retail TouchPoints. “Furthermore, our consumer behavior questions imply that nearly 40% of respondents are planning a home improvement project in the next few months,and that approximately one-third of those will use a contractor for at least a portion of the work.”
Overall, Gordon Haskett data revealed that the “Building Materials and Garden” sector saw 9.8% sales growth within the three-month period of August through October 2017, making it the highest-performing retail sector.
TJX “Leaves Business On The Table”
Perhaps the biggest surprise of Q3 is TJX, usually a reliably strong performer. While the retailer saw net sales increase 6% to $8.8 billion, along with increased customer traffic and merchandise margins, same-store sales were flat compared to last year’s 5% increase. TJ Maxx and Marshalls, the two largest divisions within TJX, actually saw net sales decline 1% in Q3. CEO Ernie Hermann noted in the company’s earnings call that TJ Maxx and Marshalls “left some business on the table,” primarily due to its fashion merchandise selection.
While the hurricane season may have helped home improvement retailers bring in more shoppers, TJX attributed its sales downturn in part to stores affected by the storms. But perhaps an even bigger factor is that markdowns are becoming more commonplace throughout apparel brands.
“The fundamental reason those sectors have been so powerful is because they appeal to the consumer’s appetite for value,” Dart said. “A lot of other retailers in the apparel sector had been almost in denial that the real market price for a polo shirt or a pair of jeans is ‘X’ dollars, so they try to sell it as ‘X + $20’. As other retailers recognize that and get much more competitive on price — Gap appears to have done that successfully — as they get closer to what you can find in those off-price channels, then the rate of growth and the velocity of their sales will slow down a little. Retailers themselves are recognizing they need to be staying in and around that price zone because that’s where the consumer’s shopping.”
The off-price retailer is confident that the holidays will be fruitful. Despite the Q3 sales miss, TJX actually raised the lower boundary of its full-year EPS guidance in its earnings report. TJX anticipates Q4 to buoy the full year results, expecting to deliver a solid 11% to 13% increase in adjusted EPS for the quarter.
Sporting Goods Takes Biggest Hits: 3.0% Sales Declines In Q3 Amid Markdowns
Although TJX may have had an off quarter, it’s a small bump in the road compared to the long-term difficulties the sporting goods sector has faced. Sporting goods (bunched with hobby, books and music) actually saw the largest sales dip of any retail sector in October 2017 at 2.4%, according to Gordon Haskett research. In the past three months, that decline was even larger, at 3.0%. The only other sectors seeing declines of any kind were department stores and electronics/appliance retailers.
Sector leader Dick’s Sporting Goods is trying to weather the storm, but the retailer has seen gross margins decline as it is forced to continue markdowns and promotions. In Q3, the retailer saw sales rise 7.6% on the back of 70 net new stores year-over-year, but comparable sales dropped 0.9%.
Foot Locker saw shares surge 26% after its earnings, the best one-day performance for its stock since 1977. Even as same-store sales dipped 3.7%, the retailer outpaced S&P estimates by posting $0.81 EPS and $1.87 billion in revenue. Like Dick’s, Foot Locker has had to rely on heavy promotion to generate sales, all while dealing with competition from name brands including Nike, Adidas and Under Armour.
“Significant challenges still remain in a very challenging environment,” said Moody’s Assistant Vice President and Analyst Mike Zuccaro in commentary provided to Retail TouchPoints. “While gross margins are pressured by high promotional levels, the company remains disciplined with regards to expense management and inventory levels.”
