Here’s the big key for retailers this earnings season: Margins are holding up, and it’s pushing profits even amid more tepid sales trends. As we have seen over the past two weeks, consumer spending remains rather cautious overall. Purchases of discretionary goods are being scrutinized more closely by buyers. All of this has led to a rather lackluster run of retail sales this earnings season. Most retailers are seeing their revenue or comparable store sales fall short of or meet Wall Street expectations. There were few sales. Despite spot-on sales figures, there have been plenty of profit beatings – with some of the most shocking surprises coming Wednesday morning from Kohl’s and Abercrombie & Fitch. One of the main reasons for the strong bottom line performance: retail margins held up. There are a few factors for the strong performance of the margin this season. Retailers Avoided Deep Discounts We haven’t seen many mentions this season of retailers resorting to deep markdowns despite more lukewarm shopping trends. The absence of such discussions is striking. Stores have avoided sell-off situations. Even a beleaguered retailer like Kohl’s made no mention of extreme promotions in its earnings release. Some retailers actually talked about lower price discounts: Target cited “lower clearance discount rates” as one of the factors that benefited gross margin. Urban Outfitters saw “significant improvement in gross margins.” This is the result of “declining markdowns of merchandise from the Anthropologie Group and Free People Group brands.” Reduced Transportation and Shipping Costs Another major cost driver related to the pandemic has been high transportation costs for retailers. These costs seem to have fallen in recent months. Mentions of this season continue what we heard three months ago from the retail industry. Urban Outfitters commented, “The increase in gross margin rate is primarily due to higher initial trade margins across all three brands, primarily due to lower inbound freight costs. Abercrombie & Fitch saw its gross margin improve “primarily due to a 760 basis point advantage from lower transportation costs.” TJX said the profit margin was “primarily driven by higher-than-expected freight profit” and that an increase in the freight margin “was driven by a significant benefit from lower freight costs.” Strong Cost Controls While retailers have benefited from more favorable inventory levels and transportation costs, many are also doing a decent job of cutting overhead expenses and keeping those costs under control (even as labor remain high). In many cases, we saw lower selling, general and administrative (SG&A) expenses that contributed to operating profits. Walmart experienced better-than-expected operating margin expansion, supported by “operating expense leverage.” Lowe’s operating margin beat as general and administrative expenses fell 11%. Bath & Body Works has seen “the early benefits of our cost optimization initiatives”. Kohl’s reported a 4.2% decline in SG&A expenses, outpacing the 3.3% drop in net sales. VF Corp’s SG&A expenses fell 5% year-on-year, outpacing the 3% decline in revenue. Many more important retail earnings reports to come next week. Thursday, Best Buy, Dollar Tree, Ralph Lauren, Costco, Gap and Ulta. Next week we get the department store behemoths Macy’s and Nordstrom. Dollar General, Lululemon, PVH and Michael Kors parent Capri will also report.
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Here’s why retailers are beating profit estimates, even with lackluster sales
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