It’s been a mixed week for retail, which has seen the release of third-quarter financial reports that both impressed and disappointed Wall Street.
While Target and Nordstrom painted a rosier picture for the sector, lowered outlooks at both Macy’s and Kohl’s battered their shares over the past couple days.
Amid shifting consumer demands, rising brick-and-mortar rents and a trade war-induced economic slowdown, retailers are heading into the critical holiday season with great expectations — despite the threats posed by a heavily promotional environment coupled with a shortened shopping period.
Here, FN rounds up the top trends that impacted retail’s third quarter.
Strategic Store Openings
As Target Corp. seeks to go small with its stores, Nordstrom Inc. has expanded with a massive opening in America’s shopping capital.
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The third quarter marked the Seattle-based company’s first since welcoming its 320,000-square-foot women’s flagship on New York’s 57th Street, where it recorded 85,000 visits during the first weekend alone as well as a sales lift at its men’s store directly across the street.
In a statement, Nordstrom noted improvements in its loyalty program, digital marketing efforts and merchandise assortment. It has often been lauded for its innovative concepts and omnichannel savvy, including its pioneering of “buy online, pick up in store,” a revamped loyalty program and experiential store offerings.
The company subsequently upwardly revised its earnings per diluted share outlook of $3.30 to $3.50 for the full year, compared with the prior guidance of $3.25 to $3.50. Earnings per diluted share of 81 cents bested forecasts of earnings per share of 64 cents. Profits were $126 million, compared with $67 million for the same period in 2018, and revenues decreased 2% to $3.67 billion but met analysts’ bets.
On the other hand, Target has invested more resources into expanding its ship-from-store capabilities to leverage its fleet of 1,855 outposts in the United States, as well as opening small-format stores and campus locations at a time when many competitors are shrinking their footprints.
Same-store sales jumped 4.5% on top of last year’s 5.1% — a figure the Minneapolis-headquartered firm pointed out has increased nearly 10% over the last two years. Revenues for Target online channels rose 31%, driven by same-day fulfillment services including “buy online, pick up in store” as well as curbside pickup and the membership-based Shipt.
Target raised its guidance for adjusted earnings per share to a range $6.25 to $6.45, versus the previous range of $5.90 to $6.20. It logged adjusted earnings per share of $1.36 — a 24.9% gain from the same period in 2018 and much better than predictions of $1.19. Profits soared 14.8% to $714 million, and revenues for the quarter climbed 4.7% to $18.67 billion, just ahead of forecasts of $18.49 billion.
A Warm Start to Fall
Both Macy’s Inc. and Kohl’s Corp. cited the late arrival of the fall as one of the reasons behind their disappointing performances in the third quarter.
Macy’s, which slashed its outlook for the rest of the year, blamed its revenue miss on the warmer start to September coupled with slowing foot traffic, amid a broader shift from brick-and-mortar to online retail. It reported its first same-store sales decline in two years during the third quarter — a drop of 3.5% that CEO Jeff Gennette acknowledged as “steeper than we expected.”
Kohl’s also said that unseasonably warm weather affected its top line. With temperatures higher than usual in September, more retailers were using discounts to move unsold products off shelves. Same-store sales at Kohl’s, which grew 2.5% in the same quarter last year, increased only marginally by 0.4% this Q3, versus expected growth of 0.8%. The company added that it expects this heightened promotional period to continue through the year as the holiday shopping season takes shape.
Off-Price’s Winning Streak
Ross Stores Inc. and TJX Companies Inc. offered more proof of the resiliency of the off-price sector.
On Tuesday, the TJ Maxx and Marshalls parent logged earnings of 68 cents a share on profits of $828 million. (Analysts predicted 66 cents a share.) Ending Nov. 2, revenues climbed 6% to $10.45 billion, versus forecasts of $10.32 billion, and same-store sales were up 4% over last year’s 7% gain.
For the same three-month period, Ross yesterday posted earnings per share of $1.03 for the quarter ended Nov. 2, topping the consensus estimate of $0.97 per share. Comparable store sales likewise got a boost, growing 5% on top of the prior year’s 3% increase. Revenues for the quarter reached $3.8 billion, beating expectations of $3.77 billion.
Over the past few years, low-price and discount retailers have consistently bucked industry-wide trends amid retail turbulence spurred by digital disruption, among other factors. Experts believe a significant factor in the success and agility of off-pricers has been their ability to offer both cheap prices and a treasure-hunt experience that can’t be easily replicated online. The model also allows the chains to be more flexible with inventory, leaving them less vulnerable to macroeconomic uncertainty brought about by the U.S.-China trade war.
Ongoing and Impending Tariffs
Less than a month remains before tariffs on the second round of the fourth tranche are scheduled to take effect on Dec. 15. The 15% levy then would affect footwear, apparel and other accessories. That’s on top of a 15% duty that has already hit many consumer goods from China, when first round levies of the fourth tranche were applied on Sept. 1.
While Nordstrom wrote that the impact of tariffs “is not expected to be material for the year,” TJX has warned investors that it has already begun to see pressure on its margins due to levies. Companies like Target and Macy’s, on the other hand, are leveraging their vendor and supplier relationships in an attempt to minimize the possibility of passing down costs to consumers.
“In Q2, tariffs pressured us by about $50 million. In Q3, that’s going to be about $60 million,” Target CEO Brian Cornell added during the firm’s call with analysts. “But our teams — particularly our merchants and our sourcing team — have done a phenomenal job of really working through this challenging landscape and allowing us to deliver great value to our guests at a time when they need it most.”
Other retailers have doubled down on their diversification strategy. Several retailers have relocated parts of their supply chains to countries outside of China, including Vietnam, Indonesia and Mexico.
“We’ll continue to do that to further reduce our exposure to China,” said Kohl’s senior EVP and CFO Jill Timm. “However, we do recognize this is a fluid situation, so everything right now is embedded in our outlook.”
Ross COO Michael Hartshorn echoed the same sentiment, “It’s too early to speak about the impact longer term. Obviously, the longer the tariffs remain in place, the more pressure it’ll put on the retail marketplace, so the situation remains very fluid at this point.”
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