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From Macy’s to Lululemon, Who Won Holiday 2022, What Drove Success and What Lies Ahead

While the holiday season saw a strong uptick in total retail sales, with inflation-powered 7.6 percent year-over-year growth, apparel sales rose just 4.4 percent, according to data from Mastercard SpendingPulse.

Recent preliminary figures released by fashion companies ahead of the ICR Conference that started Monday illustrate a bit of a divide that likely contributed to the sector’s lagging behind the broader retail sector. While the season’s winners include Lululemon, DXL and Boot Barn, the holiday wasn’t so jolly for companies like Macy’s, American Eagle Outfitters and Tilly’s.

Throughout day one of the ICR Conference on Monday, retail execs called out current macroeconomic conditions, consumer spending habits, 2022’s inventory glut, private label pivots and an overly promotional environment as major factors impacting their holiday performance.

Macy’s expects conservative 2023 merchandise buying environment

Macy’s expects its fourth-quarter net sales to be at the low-end to mid-point of the previously issued range of $8.16 to $8.40 million, which would represent a 5.8 percent to 3 percent decline from the year-prio. Adjusted diluted earnings per share are expected to be in the previously issued range of $1.47 to $1.67, down from $2.45 a year ago.

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But while the industry was defined by an explosion of inventory, Macy’s has successfully been paring down. On a percentage basis, total end-of-quarter inventories are on track to be slightly below last year and down mid-teens relative to 2019.

“When you think about how we’re looking at 2023, we’re going to be more conservative with our receipts, and we’re holding back a healthy open to buy reserve to be able to respond as the customer does by category in the season,” Macy’s chairman and CEO Jeff Gennette said during the conference. “So while we’re taking a cautious view, we’ll be ready if the customer pivots.”

Macy’s started November with inventory up just 4 percent from 2021 totals, with the company seeing its best performance across occasion-based merchandise, as more people attended holiday parties, New Year’s parties and weddings. Gennette said top-selling categories included dress shoes, men’s suits and luggage.

On the other hand, the CEO said Macy’s is more cautious about overbuying “self-purchase” products going into 2023, which experienced a lull period at the end of October and in some parts of November and December. The lulls largely occurred outside of major shopping events like Black Friday weekend and Christmas weekend.

“When you look at the self-purchase category—a lot of the sportswear brands, casual apparel and some of the home categories—that lull was deeper than we expected,” Gennette said.

Macy’s is also undergoing a facelift within its private-label business, which Gennette calling it a three-year reinvention project across all of the retailer’s owned brands. Gennette said the company will both refresh existing brands and develop new ones, with the goal of increasing private-label penetration across Macy’s sales.

Gennette highlighted the Macy’s INC (International Concepts) label, which is the retailer’s top women’s brand selling tops, dresses, bottoms, sweaters, shoes and jeans, as a label that has seen success upon its repositioning over the past year. “You really see it in the comps that we’re now getting,” he said.

Chief financial officer Adrian Mitchell reiterated some of the points he made last month at the Morgan Stanley Global Consumer and Retail Conference, particularly related to consumer health and how it has impacted Macy’s.

“We do believe that the consumer will remain under pressure,” Mitchell said. “As we look at our credit card data, there are some indicators that continue to trend in a direction, which is payment rates are deteriorating, and debt balances are higher. That’s just an indication that the consumer just has less capacity to spend…and we believe that that’s going to continue into 2023.”

The department store expects to report full results for the fourth quarter and fiscal year 2022 in early March 2023.

J.Jill CEO: Our customer is ‘resilient, but not impervious’

Claire Spofford, CEO and president of J.Jill, shared some of Mitchell’s concerns, referring to the women’s specialty apparel retailer’s typical consumer as “resilient, but not impervious,” to the macroeconomic spending concerns.

J.Jill’s primary consumers, 45-to-65-year old women earning $75,000 annually on average, weren’t as affected in the early stages of 2022 as inflation kicked up, she said, though that began to change as the market continued its downward slide last year.

“As she looks at her portfolio, as she looks at an impending recession, she’s going to be a little bit more cautious, and that’s why we’re taking the approach that we’re taking as we go into 2023,” Spofford said. “We’re going to earn our way to any growth. We’re not going to get out over our skis.”

To earn this growth, J.Jill is putting profitability above top-line revenue. The retailer is, like many others, focused on more disciplined inventory management, with Spofford indicating that the company ditched the 30 percent markdowns often applied to new products.

J.Jill also scrapped its prior cadence of offering 12 major floor sets of new product per year, instead opting to flow product more regularly.

“We’re giving the products a chance to sell at full price,” Spofford said during the conference. “Because we’re about 50/50 brick-and-mortar and digital, we can read the business very quickly. We will promote surgically things that aren’t turning as quickly in-season and move through them quickly so that we can come out of each quarter as clean as we possibly can.”

J.Jill reaffirmed its own fourth quarter and full-year guidance, expecting holiday period revenues to be flat to down 3 percent year over year, and for adjusted EBITDA to be in the range of $9 million and $11 million.

For fiscal 2022, the company continues to expect revenues to grow between 4 percent and 5 percent year over year, and for adjusted EBITDA to range between $103 million and $105 million.

Despite headwinds, store openings and reformatting continue

Multiple brands at ICR emphasized the importance of brick-and-mortar expansion in today’s retail environment, with DXL, Boot Barn, J.Jill, Tilly’s and Chico’s FAS planning to open new stores in 2023 and beyond.

With 243 stores, J.Jill is down from a peak of 287 stores in 2019, but plans to add 20 to 25 new stores over the next few years. Tilly’s expects to open 15 more stores in 2023, building on its current 249-store base.

DXL has 283 stores in 46 U.S. states, but the company plans to open five new stores this year, between 15 and 20 in 2024 and another 15 and 20 in 2025. Boot Barn, with 333 stores in 41 states, has plans to reach more than 340 by the end of its fiscal year. The Western lifestyle retailer increased its long-term store target from 500 to 900 store locations in October, with CEO Jim Conroy saying that the company is “well on pace” to reach that goal.

And Chico’s FAS has 1,261 stores in the U.S. across its three major brands: Chico’s, White House Black Market and Soma. The company plans to open up to 30 Soma locations annually through 2024, with the company opening 27 in 2023. Due to the Chico’s and White House Black Market locations growing by double digits for the first nine months of this year, the company is slowing down the number of its store closures. While the apparel retailer originally targeted 40 closures in 2023, the company has reduced that number to 26.

DXL and Boot Barn lean on differentiation

Destination XL Group, which sells “big and tall” clothing for men under the DXL banner, saw total sales of $111.7 million, a 4.8 percent increase compared to $106.6 million for the nine-week holiday sales period ended Jan. 1, 2022.

Comparable sales for the same holiday period increased 7.5 percent, with a comparable sales increase of 8.9 percent from stores and 4.9 percent from the direct business.

Based on the holiday sales and expectations for the remainder of the fourth quarter, the men’s wear retailer is updating its guidance toward the upper half of its sales range for fiscal 2022, with total sales now expected to be $540 million to $545 million, an increase from the previous guidance of $535 million to $545 million.

The anticipated adjusted EBITDA margin of 12.5 percent to 13.5 percent is unchanged from the company’s previous guidance.

DXL has managed to buck the industrywide trend of mass markdowns and sell its goods at full price.

“For those of you who are not familiar enough with this story, and you’ve not really seen us over the last few years, you would have missed the fact that we’ve now gone two Thanksgivings, two Black Fridays and two Cyber Mondays with no promotion, and no public discounting,” said Harvey Kanter, CEO, president and board director of Destination XL Group, during the conference.

The retailer’s product covers significant ground that hasn’t been matched within the men’s wear ecosystem. Kanter says that nearly 85 percent of the company’s product assortment is not available in any other retailer. This includes exclusive product from brands like Vineyard Vines, Adidas Golf, Nautica, O’Neill and even Ralph Lauren, which produces one collection for DXL per quarter.

DXL said that it will be launching two new national merchandise brands that will be exclusive to the retailer in big and tall sizes. Life is Good and Original Penguin Golf will be available both on the retailer’s website and in select stores starting in the Spring 2023 season.

“While we don’t tout that to the customer…if you want this, we’re the only place to buy it. That’s what it amounts to. It’s a defendable moat,” Kanter said. “It’s an important element of our curation of understanding who our customer is and why we can generate revenue growth.”

Alongside DXL, Boot Barn is carving its own niche within exclusive brands, according to Conroy. The CEO was quick to point out that exclusive brands should not be identified as private-label brands, and that they “tend to be the best, highest-quality product in the store.”

According to Conroy, three of the top-five selling brands in the retailer’s business are Boot Barn-exclusive brands, which wasn’t the case as little as five years ago.

“Our exclusive brand business used to be about 3 percent of sales when I first got here,” Conroy said. “Now it’s about 33 percent of sales 10 years later, and the most recent quarter we had a really nice step up in our exclusive brand business growing 570 basis points to about 34 percent of sales.”

For the third quarter ended Dec. 24, Boot Barn’s net sales increased 5.9 percent to approximately $514.6 million as the company continues to open new stores. The retailer now operates in 43 of the top 50 U.S. cities.

Same-store sales declined approximately 3.6 percent, coming on the heels of 54.2 percent same-store sales growth in the prior-year period. Retail store same-store sales declined approximately 0.8 percent and e-commerce same-store sales declined approximately 15.2 percent.

Merchandise margin declined 190 basis points (1.9 percentage points) compared to the prior-year period, driven primarily by a 180 basis-point headwind from higher freight expenses. As such, net income per diluted share of approximately $1.74 slipped from the prior-year period’s per-share net income of $2.27.

Tilly’s pins rough holiday on inflation

Unfortunately, Tilly’s was unable to capture the magic of the holiday season, with total net sales of $150.9 million decreasing by 12.9 percent from $173.3 million for the previous year’s comparable period.

The youth-centric mall retailer said it believes these results were negatively impacted by this year’s inflationary environment compared to much more favorable market conditions during the 2021 holiday period resulting from several pandemic-related factors.

During the conference, CEO Ed Thomas said the specialty retailer struggled to adapt to the promotional environment, which hurt third-party product sales.

“One of the things that surprised us a little was that the environment was a lot more promotional than we expected it to be, and we’re generally not a promotional company,” Thomas said. “We saw some of our big brands like Vans get very aggressive out of the box in terms of promoting their own DTC business, their own stores. We were up against those challenges and we elected not to get into the promotional game to the extent that we saw others. I think that probably somewhat hurt our top-line results.”

Total comparable net sales, including both physical stores and e-commerce, decreased by 14.4 percent for the 2022 holiday period. On a three-year basis, total comparable net sales increased by 0.2 percent.

Tilly’s now expects its fiscal 2022 fourth quarter net sales to be in the range of approximately $178 million to $180 million, a 12 percent to 13 percent decrease from a year ago, while losses per share are forecast to be in the range of 1 cent to 4 cents. These numbers are down from prior expectations of approximately $183 million to $188 million and per share, and earnings per diluted share to range between 2 cents and 6 cents.

The retailer expects to end the year with less inventory per square foot compared to the end of fiscal 2021. Mike Henry, chief financial officer of Tilly’s, said the specialty retailer was one of the “very few companies that actually entered the fourth quarter with inventory below last year on a per square foot basis,” which kept the company from having to be in the “hyper-promotional environment” the way others were.

Lululemon Athletica raises sales guidance, but compressed margins worry investors

Although major apparel brands such as Lululemon Athletica, American Eagle Outfitters and Abercrombie & Fitch didn’t present at ICR, each company gave insight into what to expect for the holiday season.

Lululemon Athletica now expects net revenue to range between $2.66 billion to $2.7 billion, representing a 25 percent to 27 percent jump over fourth quarter 2021 sales figures. This improves on the company’s previous guidance range of $2.605 billion to $2.655 billion.

Estimates for diluted earnings per share are now expected to be in the range of $4.22 to $4.27 for the fourth quarter, narrowing compared to the company’s previous guidance range of $4.20 to $4.30.

Lululemon, which last April unveiled a five-year growth plan to double revenue by 2026, recorded per-share earnings of $3.36 in the year-earlier fourth quarter.

However, the Vancouver-based yoga pants seller warned that gross margin for the fiscal fourth quarter would decline 90 to 110 basis points compared to its previous expectation for an increase of 10 to 20 basis points.

That and the tightened earnings delivered a hit to the athleticwear company’s stock, which fell nearly 11 percent in early Monday morning trading. Lululemon’s investors already showed concern after its third-quarter earnings due to the revenue guidance that initially missed Wall Street estimates, as well as gross margins falling 1.3 percentage points and inventories increasing 85 percent from the prior year.

But the brand, which launched its first shoe last year, is confident about the year ahead.

“We are pleased with our continued revenue growth and momentum in the business, as our teams navigate a dynamic macro-backdrop,” Lululemon Athletica CEO Calvin McDonald in a statement. “In Q4, traffic remains strong across both physical and digital channels, and we anticipate delivering another quarter of solid earnings growth consistent with our updated EPS forecast.”

American Eagle Outfitters hypes ‘excellent inventory management’

American Eagle Outfitters, Inc. (AEO) said fourth-quarter-to-date brand revenue through Saturday is down approximately 3 percent. This is on the higher end of the company’s expectations, with American Eagle “tracking slightly ahead” and Aerie in line with expectations.

AEO’s Quiet Platforms operation, which the retailer acquired in late 2021 for approximately $360 million, is expected to add 2 percentage points to fourth quarter brand revenue. The Quiet business, which gives AEO a logistics network that includes in-market fulfillment centers across various U.S. cities, grew 80 percent in 2021. The subsidiary not only serves American Eagle and Aerie, but more than 60 other brands including Kohl’s, Steve Madden, Fanatics, Outdoor Voices and Birdies among others.

Gross margins are now expected to be on the high end of the company’s previous guidance of 32 percent to 33 percent, reflecting controlled promotions fueled by strong inventory management, AEO said. Current inventory is well-positioned with quarter-end inventories expected to be down compared to last year, in line with prior guidance.

“Following record performance last year, we achieved our second-highest holiday sales period in company history. I am pleased to see profit margins tracking at the high end of our expectations, powered by excellent inventory management and promotional discipline,” said Jay Schottenstein, AEO’s executive chairman and CEO. “Looking ahead, we are focused on delivering a leading customer experience across brands, while prioritizing free cash flow and shareholder returns.”

The company will release fourth quarter and fiscal 2022 results on March 1.

Abercrombie & Fitch sales increase fueled by women’s business

AEO’s chief competitor, Abercrombie & Fitch, had a more upbeat quarter, showing an improved fourth-quarter and full-year guidance across both net sales and operating margin.

Net sales for the quarter are expected to range between a 1 percent and 2 percent increase, an improvement from the initially projected decline of 2 percent to 4 percent. Operating margin as a percentage of sales is forecast between 6 percent and 8 percent, up from 5 percent to 7 percent.

The full 2022 fiscal year projections are better than expected as well, with net sales anticipated to dip at a range of 1 percent to 3 percent, instead of the previous 2 percent to 3 percent. Operating margin would improve slightly, to a range of 2.5 percent to 3 percent from the previous mark of 2 percent to 3 percent.

Fran Horowitz, CEO of Abercrombie & Fitch Co., said she was “pleased” with the quarter-to-date performance.

“At Abercrombie, the strong momentum we have seen all year at the Abercrombie & Fitch brand continued in the holiday season with the women’s business on track to deliver its highest fourth quarter sales ever,” Horowitz said in a statement. “Importantly, this strong performance has been complemented by an acceleration in men’s growth from third quarter trends. For Hollister, while we expect to finish the fourth quarter with sales below 2021 levels, the sales trend improved nicely from third quarter as we have begun to realize initial benefits from assortment adjustments and personnel changes.”

Horowitz noted that the retailer, which also owns brands like Gilly Hicks and the D’Amelio sisters’ Social Tourist label, continues to manage operating expenses “tightly.”

The CEO also said that Abercrombie intends to target an inventory level consistent with 2021 by year end, positioning the company’s brands to chase receipts in the spring season.

Arhaus, Five Below not slowed down by consumer spending

Additional retailers not focused on apparel revealed updated sales figures for the holiday season.

Arhaus, an upscale omnichannel home furnishings company that went public late in 2021, offered a glimpse at its year-end sales in a statement from co-founder and CEO John Reed.

“We are encouraged by the outstanding performance and continued momentum in our business in the fourth quarter resulting in expected full-year 2022 record net revenue exceeding $1 billion and expected comparable growth of approximately 51 percent,” Reed said.  “Demand comparable growth for the fourth quarter accelerated from the mid-single-digit range through early November to approximately 10 percent for the quarter overall and was approximately 13.5 percent for the full year.”

For the fourth quarter, Arhaus expects revenue of $351 million to $356 million, amounting to 47.5 percent to 49.6 percent growth from the prior-year’s $238 million. Implied comparable sales growth totals 45.5 percent to 46.5 percent.

Full-year 2022 guidance calls for net sales between $1.22 billion and $1.23 billion, up 53.5 percent to 54.1 percent from $797 million in 2021 sales.

Reed said that while the company is mindful of the current economic backdrop, Arhaus plans to expand its showroom footprint, accelerate brand awareness and continue to enhance its omnichannel and technology capabilities to support the company’s growth and leverage its scale.

Meanwhile, specialty discount retailer Five Below said fourth-quarter net sales increased by 11.2 percent to $1 billion from $902.3 million in the comparable fiscal period of 2021. Comparable sales for the holiday period increased by 0.9 percent.

“Given this holiday performance, we now expect to finish the fourth quarter and full year near the high end of our previously provided guidance ranges,” said Joel Anderson, president and CEO of Five Below, in a statement. “We are entering fiscal year 2023 with momentum and excited to be executing our Triple-Double strategy, including opening 200+ new stores for the first time in our history and converting over 400 stores to the new Five Beyond format. We look forward to discussing Five Below’s full year 2022 results and outlook for fiscal 2023 on our fourth quarter earnings call in March.”

The company reiterated its previously provided guidance, with fourth-quarter net sales expected to range from $1.09 billion to $1.11 billion, which would be an 8.9 percent to 11.4 percent boost in revenue. Comparable sales will fall within a range of a 1 percent increase to a 1 percent decrease.

Diluted income per common share of $2.93 to $3.09 would be an improvement from last year’s $2.49 per share.