There’s not much to like about retailers’ first-quarter earnings, and even their top executives are admitting it.
“Clearly, our industry is in something of a rough patch,” Macy’s Chief Financial Officer Karen Hoguet told analysts on the firm’s earnings call. Looking at the share price of many major retailers, that rough patch becomes obvious. Macy’s is down 50 percent over the past year, while Nordstrom is down 39 percent, and Kohl’s Corporation is down 45 percent. The only “highlight” is J.C. Penney Company, Inc. which is down 3 percent over the past year, but fell another 5 percent at the market open on Friday.
It would be tempting to blame overall economic trends for the slowdown, but headline retail sales just saw its biggest jump relative to economists expectations in more than three years. So what gives?
The answer may lie in a changing consumer. “Bottom line, we have quite the contradiction between what many U.S. retailers said this week about the macro landscape and today’s April retail sales figure,” said Peter Boockvar, chief market analyst at the Lindsey Group. “That said, it goes back to the point of shifting channels vs slowing sales (quite a difference between online and department stores).”
Here’s a roundup of what some of these retailers are saying in their earnings calls this week. Spoiler: the optimistic comments are few and far between.
Macy’s Chief Financial Officer Karen Hoguet:
– The quarter was even worse than the firm expected, and it got worse as it dragged on. “While the quarter started stronger, the business weakened considerably versus our expectations beginning in mid-March, and that trend continued through April. As Terry [Lundgren, Macy’s, Inc. chairman and chief executive officer] said in our press release, we are seeing weakness in consumer spending levels in apparel and related categories. The number of transactions declined 7 percent in the quarter, which is far worse than what was experienced last year.”
– International spending definitely didn’t help. “[W]e continued to be negatively impacted by reduced spending by international tourists. Sales on international tourist credit cards were down 20 percent in the quarter on top of a 21 percent drop last year in the first quarter. This reduction in spending impacted our comp by a little less than a point versus last year. This was disappointing and had a disproportionately negative impact on our center core businesses given what these visitors buy.”
– Digital sales were good, but there’s a catch. “Digital sales continued strong, still growing double digits, but it too grew less rapidly than anticipated.”
– The company is still confident it can weather the storm. “[A] setback is a setup for a comeback. That is how we are looking at the business, even if our comeback is taking longer than expected to take root. “
Although there wasn’t a great answer for the fact that retail sales broadly were up, but Macy’s sales struggled.
“We’re frankly scratching our heads. We see the same economic data you all see and it would point to a customer that would be spending more. I think that gets to what he and she are spending it on. Savings rates are high, which tells you that either they’re purposefully saving more or that there’s some of that savings that can be used for discretionary spending if they get motivated to do so. Some of it is spending in different categories; health, restaurants, travel. I’m not sure, but I would say that we too are somewhat puzzled by the data that we’re seeing on the consumer and the traffic we’re seeing in the stores and on the site.”
Kohl’s Chief Executive Officer Kevin Mansell:
– While the firm tried to boost traffic to its physical stores, that didn’t work out as well as it hoped. “[I]t was definitely a difficult start to 2016. It’s hard to gauge how much of the sales shortfall is related to macroeconomic factors and how much is related to company-specific factors. We definitely focused on improving our sales, but especially our traffic to brick-and-mortar stores. We are relooking at all of our marketing vehicles to see where we can drive more business to the stores as well as ensuring our value message is particularly strong. Definitely not satisfied with the results so far and we’ll take action to remain top of mind with the families that we serve.”
– Mansell tries to tell it like it is. “I mean the other thing I would add, Mark [Altschwager of Robert W Baird & Co Inc.], is just there wasn’t a lot to get very excited about in our first quarter performance, but one thing that I think the team did well and I think we’re going to be well-positioned, regardless of where the business goes the remaining of the year is receipt flow and inventory.”
– Things should get better later this year. “[W]e still feel good that the sales trend will improve in the second quarter. And we definitely feel like it’ll improve further as we go into the back half.”
– The industry is going to have to adapt to the changing consumer. “I think we mentioned there seems to be some more macro issue given performances of both ourselves and competition. There seems to be some change in consumer behavior in terms of traffic coming into our stores maybe because of that. We definitely have opportunity in our marketing area to improve our effectiveness.”
Nordstrom’s Chief Financial Officer Michael Koppel:
– The firm updated its guidance for the rest of the year, becoming more pessimistic. “I’d like to address our financial outlook. In updating our plans for the remainder of the year, we feel it is appropriate to realign our outlook given the uncertainty in trends and expectations for a continued promotional environment. Comp sales are expected to be between a 1 percent decrease to a 1 percent increase compared with our prior outlook of flat to a 2 percent increase.”
– The business is and will continue to change. “[A]s we’ve been talking for the last couple of years, we’re seeing a transformation in our business model. The e-commerce element continues to grow at a good pace and the impact of technology in digital on the customer experience continues to accelerate. So that would imply our commitment to technology and fulfillment and the things that continue to support that business is going to be something we’re going to stay very strong on. On the other side, we continue to see traffic falling off in malls. And how we think about our store-based asset will probably require some level of adjustment.”
James Nordstrom, Executive Vice President/President of stores had an optimistic comment to share. “All of our stores are profitable. They all make money.”
As a number of analysts said, best of luck this quarter.