Mixed Q2 Earnings Likely While Headwinds Could Impact Q3
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Second-quarter earnings could be a mixed bag, marked by disappointing store traffic and concerns around how aspirational luxury are spending—or not.
TJX, Burlington, Ross Stores, Ralph Lauren and Lululemon are all in good shape to turn in a good quarter, according to Wells Fargo retail analyst Ike Boruchow. VF Corp. and Gap Inc., on the other hand, could be on shaky ground. There’s no telling yet if Capri Holdings and Tapestry will meet or miss Wall Street estimates, he said.
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Capri is in the process of tweaking its assortment to appeal to different types of customers while Tapestry could get a lift from selling the types of goods that perform well during tougher times, said TD Cowen’s Oliver Chen, who warned of ongoing concerns around slow consumer spending.
Off-price retail has been particularly resilient as consumers hunt for bargains. At the opposite end of the spectrum, Ralph Lauren CEO Patrice Louvet in May said the company’s value-oriented consumers, especially those in North America and Europe, “are increasingly pressured” by headwinds such as inflation and higher prices. Sales in China helped to offset declines in North America.
Like Ralph Lauren, Mainland China is also Lululemon’s largest international expansion opportunity. It recently partnered with European e-commerce retailer Zalando, to reach customers in Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Italy, Poland, Spain, Sweden and the Netherlands, beyond already serving shoppers in the U.K., Germany South Korea and Australia. Telsey Advisory Group’s chief investment officer Dana Telsey has an “outperform” rating on Lululemon shares, with a price target of $430 a share. Lululemon shares are currently trading in the $378 range.
Jefferies equity analyst Ashley Helgans issued a report last month looking at foot and digital traffic from Placer.ai and Similarweb data to analyze consumer shopping patterns from April through the end of June. June trends indicated that one-year foot traffic was better month-over-month for both brands and department stores. The two-year foot traffic trends showed improvement month-over-month for brands, but was essentially flat for department stores. Nordstrom Rack and Coach Outlet web traffic softened, while Michael Kors was “holding up better.” In addition, Nordstrom’s digital traffic accelerated ahead of its Anniversary sale.
What companies do with their full-year guidance, whether their raise, lower or maintain it, will give key clues about their financial health and outlook on consumer spending.
Some revised down their 2023 guidance to reflect consumer spending uncertainties. Macy’s in June lowered its adjusted diluted earnings per share guidance for the year to between $2.70 to $3.20, down from its prior estimate range of $3.67 to $4.11 in March. Others like Abercrombie & Fitch Co. raised net sales growth projections. Abercrombie upped its range to between 2 percent to 4 percent, an increase from the prior outlook of up 1 percent to 3 percent. The specialty chain’s forecast also includes a 53rd week for the year, along with a net store expansion plan.
VF last week reported a wider loss for the first quarter ended July 1 to $57.4 million, or 15 cents a diluted share, on a 7.7 percent decline to $2.09 billion. While it reiterated full-year earnings per share guidance of $2.05 to $2.25, the Supreme and Vans owner said revenue for Fiscal Year 2024 is “now expected to be modestly down to flat for the year, reflecting ongoing weakness in our wholesale business and a longer than expected turnaround for Vans.”
Sales in Greater China rose 24 percent, pushing up sales in the Asia Pacific region up 13 percent for the quarter. But the quarter’s problem was the wholesale sales decline in the Americas, which fell 18 percent. Overall sales at The North Face was up 12 percent, but down 6 percent and 22 percent at Timberland and Vans, respectively. VF’s cut in annual revenue forecast signals that it sees a slowdown in demand for its apparel and sneakers it the Americas, the company’s biggest market.
National Retail Federation’s chief economist Jack Kleinhenz has said that consumers who are gainfully employed will continue to spend. However, a Wells Fargo Economics report indicates that the tight jobs market shows signs of loosening up. Job openings fell to nearly 9.6 million in June, and layoffs are still at historic lows.
Since the Fed began tightening interest rates in March last year, the jobs market now has 20 percent fewer openings. The downward trend is “consistent with” a labor market that is “slowly simmering down,” the economists concluded, adding that employers are nearly finished re-staffing and labor market turnover has settled down following pandemic disruption. There’s still no telling if the economy will make a “soft landing” after the Fed’s policy efforts.
Tech layoffs earlier this year could encourage other sectors to prune their headcounts. Last week CVS announced plans to lay off 5,000 workers to cut costs. Other jobs could be at stake as well.
Meanwhile, an Inmar Intelligence survey shows that consumers are using coupons to make back-to-school shopping more affordable. Thirty-one percent shop discount stores and 45 percent rely on sales and coupons to stay within budget. Seventy-two percent said they prefer to shop in-store instead of online for their school needs. In addition, brand loyalty is off the table as 88 percent said they would switch brands because of a coupon or discount, while 43 percent said coupons and sales are influencing their back-to-school budget.
The big loser could be small business owners as consumers shop discounters and off-price retailers. A July Small Business Rent Report from Alignable found that 55 percent of small business owners are grappling with rent spikes.
Alignable found that nearly 40 percent of non-landlord small business owners can’t afford to pay this month’s rent for the fifth month in a row due to ongoing spikes and trouble ramping up revenue. In addition, 40 percent of small business owners said “they’re only earning half or less of the monthly revenue they generated prior to COVID.” The delinquency rate for retailers is 31 percent, considered a record low for 2023. But 13 percent of landlords who haven’t raised rents yet said they’ll need to do it soon to combat the cumulative effect of inflation. And among the 55 percent already dealing with rent spikes, 15 percent said they have to pay over 20 percent more in rent costs than what they were paying six months ago.
In a spot check of retail websites of department stores and specialty chains, retailers are relying on promotions and deep discounting to clear out their spring and summer inventories. Some of that clearance will be reflected in second quarter margins. But the bulk of that discounting may mostly impact third quarter results, especially if consumers are waiting for even better end-of-summer discounts and early fall sales before making their purchases.
And adding to consumer woes in the weeks ahead could be the trend in rising gas prices at the pump. According to the American Automobile Association, gas prices are lower than the national average of $4.212 a gallon for regular a year ago, but have been on a steady rise since mid-summer. The current average for a regular gallon of gas is $3.780, but that’s nearly a 4 percent increase from $3.636 a week ago. The price one month ago was $3.538. Prices are also on the rise for premium gas and diesel options.
