Here’s why retailers are beating profit estimates, even with lackluster sales
by trendswire · 24 May 2023
Here’s the big takeaway for retailers this earnings season: Margins are holding up, and that’s driving profits even amid more tepid sales trends. As has become apparent in recent weeks, consumer spending remains fairly cautious overall. Buyers are taking a closer look at discretionary purchases. All of that led to a rather lackluster round of retail sales this earnings season. Most retailers are seeing their top-line or same-store sales figures fall short of or meet Wall Street expectations. There have been few sales hits. Even as sales numbers stayed afloat, there have been plenty of earnings improvements, with some of the biggest surprises coming Wednesday morning from Kohl’s and Abercrombie & Fitch. One of the main reasons for the strong bottom line: retail margins have held up. There are a few factors to the strong margin performance this season. Retailers have avoided deep discounts We haven’t seen much mention this season of retailers resorting to deep discounts despite more tepid shopping trends. The absence of such discussions has been surprising. Stores have avoided forced sale liquidation situations. Even a beleaguered retailer like Kohl’s didn’t mention extreme promotions in its earnings report. Some retailers have actually talked about lower sales: Target cited “lower clearance sale rates” as a factor that benefited gross margin. Urban Outfitters saw “significant improvement in gross margins.” That’s the result of “lower markdowns on merchandise across the Anthropologie Group and Free People Group brands.” Lower freight and shipping costs Another major cost driver of the pandemic was the high transportation costs for retailers. Those costs appear to have come down in recent months. This season’s citations continue what we heard three months ago from the retail industry. Urban Outfitters commented, “The increase in gross profit rate was primarily due to higher initial merchandise margins across all three brands, driven primarily by lower inbound transportation costs.” Abercrombie & Fitch saw gross margin improvement “primarily driven by a 760 basis point benefit from lower freight costs.” TJX said the profit margin was “primarily driven by a higher-than-expected freight benefit” and that an increase in merchandise margin “was driven by a significant benefit from lower freight costs.” Robust Cost Controls While retailers have benefited from more favorable inventory levels and freight costs, many of them are also doing a decent job of cutting overhead and keeping those costs in check (even as labor wages remain low). elevated). In many cases, we have seen lower selling, general and administrative (SG&A) expenses help operating profit. Walmart saw better-than-expected operating margin expansion, driven by “operating expense leverage.” Lowe’s operating margin topped as selling, general and administrative costs fell 11%. Bath & Body Works saw “early benefits from our cost optimization initiatives.” Kohl’s experienced a 4.2% decline in selling, general and administrative expenses, outpacing the 3.3% decline in net sales. VF Corp’s selling, general and administrative expenses fell 5% year-over-year, outpacing the 3% drop in revenue. There will still be plenty more big retail earnings reports over the next week. Thursday features Best Buy, Dollar Tree, Ralph Lauren, Costco, Gap and Ulta. Next week, we have the department store giants Macy’s and Nordstrom. Dollar General, Lululemon, PVH and Michael Kors parent Capri will also report.
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