August 16, 2016

Earnings Roundup: Retailers Beat Expectations Through Cost Cutting, International Growth

by Greg Harrison.

The end of the second quarter earnings season is approaching and the majority of companies yet to report are in the Consumer Discretionary and Consumer Staples sectors. This past week, six retailers within the S&P 500 reported earnings results, with all six exceeding analyst earnings expectations. Of these six companies, three of them also reported earnings improvements over the prior year, as seen below in Exhibit 1. Revenue was weaker with only two of the companies seeing year over year increases, although four still managed to post positive top line surprises.

Exhibit 1.  Retailers Reporting Last Week: EPS Growth and Surprise

2016-08-16_17-12-14

Source: Thomson Reuters I/B/E/S

The current retail environment is challenging, with mall traffic down and consumers hesitant to spend. Retailers are responding by increasing promotional activity, putting pressure on margins. Some higher end retailers, however, are pushing back against promotions in order to maintain their brand image and pricing power. Coach, Inc (COH.N) is one such company, pulling back from discounting of its merchandise sold in department stores. Coach reported EPS this week of $0.45, beating the analyst consensus if $0.41 and growing earnings 45% over the second quarter of 2015. Revenue over the same period grew 15% to $1.1B. During the earnings call, CEO Victor Luis explained the company’s approach to discounting in the department store channel, saying, “we will also be rationalizing our department store distribution, taking our door count down by about 25%, or by over 250 locations, as well as reducing markdown allowances to the channel, given the high level of promotions. While we understand that consumers may use department stores for trial and shopping across brands, the high level of promotional impressions created negatively impact our long-term brand health while generating confusion across channels.”

The $0.88 EPS result reported by Michael Kors Holdings Ltd (KORS.N) was 19% higher than the $0.74 analyst consensus, however this represented a meager 1.1% growth rate over the year before. Over the same period, sales grew 0.2%. Within company owned retail outlets, same store sales declined 7.4%. Weakness in the United States was offset by international growth. According to CEO John Idol, Michael Kors “further expanded our presence in Asia, continued to develop our men’s business globally, and expanded our luxury fashion product assortments. However, this progress was muted by the ongoing decline in mall traffic trends as well as the decrease in tourism, which negatively impacted our comparable store sales performance during the quarter.” He further explained that the company would manage its wholesale channel “through disciplined inventory control and reduced promotional activity, in order to protect our brand and margins.”

Ralph Lauren Corp (RL.N) reported an earnings decline of 2.8% with a $1.06 EPS result. Still, this result was higher than the $0.89 consensus estimate. CEO Stefan Larsson explained some of the challenges the company faced during the earnings call, saying the company faced “a combination of not having evolved our consumer offering enough in product, marketing, shopping experience and having had an operating model that has generated too much excess inventory. Having these self-induced challenges are hurting us when we, like everyone else, are facing difficult retail traffic trends in a highly promotional environment.” In response to a top line decline of 4.1%, the company is cutting costs to maintain profitability. CFO Bob Madore explained that “The Company continues to expect restructuring activities to result in approximately $180 million to $220 million of annualized expense savings related to its initiatives to streamline the organizational structure and right size its cost structure and real estate portfolio.”

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