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Retailers Talk Inventory, Omicron and Passing Along Higher Costs

Although there’s still a few more weeks left in retail’s fourth quarter, many brands were ready to disclose updates to guidance based on holiday sales on day two of the ICR Conference. They also weighed in on inventory expectations, the supply chain, consumer spending trends and the impact from Omicron.

 

Urban Outfitters Inc.

Urban, which operates three core banners under the nameplates Urban Outfitters, Anthropologie and Free People, saw total company net sales for the two months ended Dec. 31, 2021, rise 14.6 percent when compared to pre-pandemic levels. Comparable retail net sales rose 47 percent at the Free People Group, 15 percent at the Anthropologie Group and 3 percent at Urban Outfitters. Total company net sales for the 11 months ended Dec. 31 rose 14.4 percent versus the same 2019 period.

All three brands are achieving lower markdown rates, several 100 basis points lower on a year-over-year basis, so we’re really happy with the quality of sales and how we’re driving the business right now from a category perspective in apparel and home,” Frank Conforti, Urban’s co-president and chief operating officer said, adding that the Free People banner does not sell in the home category.

Conforti told attendees that the holiday season saw store sales a “little weaker than we had anticipated.” He attributed that to people choosing digital options to get their presents in time for gift giving. “We just really didn’t see that lift the way we had under previous holiday season,” he said.

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Free People’s 47 percent increase was an “extremely strong number,” he said, but that also reflected a slight slowdown for the banner. As for Urban, Conforti said the brand continues to work through its exit from some promotional marketing strategies.

Inbound freight costs were higher than anticipated. “Obviously it was really expensive to get product here. You know, all retailers—I think—were nervous about having enough inventory and having it on time for the all-important holiday selling season, so we relied very heavily on air. And it was expensive to get product here,” Conforti said.

Conforti was upbeat about the consumer spending trends he’s currently seeing, describing the customer as “incredibly resilient” and that they still seem to be “buying at a really high rate.”

But he did note that the Omicron variant is affecting the company’s ability to meet staffing needs, including at its stores.

“We’ve seen a higher spike of absenteeism right now in our distribution centers…. [T]he biggest restriction and where our hands are tied the most on the business is really about our inbound speed. You know, we still are nowhere near the level pre-Covid that we’d like to be from a mix perspective as to how we bring things in—ocean versus air—as well as just the speed that we’re able to get out of each of those modes,” Conforti said.

 

Lands’ End Inc.

Jerome Griffith, CEO, told attendees that the apparel and soft home goods retailer has been focused on partnerships. In addition to launching in over 500 Kohl’s stores, it’s also sold on Amazon and will begin to have a presence at QVC next month. It is also working with others on collaborations, including Draper James and the upcoming one with Blake Shelton.

The CEO also spoke about the challenges connected with the “extreme increase” in costs, both connected to the supply chain and in raw materials for product. Griffith said his company, along with others, will have to pass on a lot of those costs to the consumer.

“Consumer demand has been pretty strong, and consumers have been relatively willing to meet these new costs,” the CEO said. “I think now people have an opportunity to really look at how much product are you making, how you’re pricing it, what do you think you’re going to sell, and probably bring down your investment costs at the same time as increasing your retail costs out the door.”

According to Griffith, Lands’ End started raising prices in the fall, and has done another round of increases for the spring. He said the price hikes are in the range of “low double-digit increases.”

“From a percentage standpoint, we think that that’ll help us manage what the costs look like going forward,” he said, adding that no one has a clear picture as to when the cost pressures will begin to subside. While everybody thinks it won’t last forever, one should probably plan for it to continue into 2022. “It’s going to be another volatile year when it comes to costs and supply chain,” he said.

 

On Running

Footwear startup On Running was founded in the Swiss Alps and is backed by Roger Federer. It completed its initial public offering last September and raised nearly $500 million in the process. In its first quarterly report as a public firm in November, the company reported record third-quarter sales that spiked up 67.6 percent to 218 million francs ($235.2 million) from $130.1 million francs ($140 million) in the same year-ago period, and said it was planning price hikes for 40 percent of its North American product in Spring 2022.

At the ICR Conference, co-CEO and CFO Martin Hoffmann said that as a premium brand, the company has “a lot of pricing power.” Although it just began raising prices in the U.S., it hasn’t done so yet in other parts of the world. He also said the company’s business-to-consumer (B2C) channel has a “better gross profit margin” than its wholesale channel.

“We believe that in the long term, B2C will continue to outpace wholesale, despite the fact that we strongly believe and support both sports channels, but at the same time On will continue to be a multichannel brand,” Hoffmann said. 

He added that the company’s ability to build a premium performance brand will define its pace of growth, and “we do not expect inventory to be a limiting factor there.” Although the company was impacted by the Covid-related shutdown in Vietnam last year, he said production capabilities are “back at 100 percent.”

Hoffman noted that its factory partners have been working on a fast-track basis to give the company more capacity. “This also includes an expansion into Indonesia, where we will be just starting now to work with the new factory,” he said.

What isn’t changing is the ongoing “very volatile market” when it comes to shipping costs, air freight rates and labor shortages in some of its warehouses around the world, Hoffman said.

 

Abercrombie & Fitch Co.

The specialty chain said net sales for the fourth quarter increased between 4 percent to 6 percent from year-ago net sales of $1.12 billion. Sales were flat to down 2 percent from 2019’s net sales of $1.19 billion. The company said the decline from the prior outlook of up 3 percent to 5 percent from the same comparable 2019 period was impacted by unexpected and uncontrollable inventory receipt delays, as well as increased Covid-related impacts and restrictions.

Despite recent trends connected to holiday inventory receipts, Abercrombie CEO Fran Horowitz told attendees that the company will end the quarter “strong based on recent trends.” She added that the company likely would have met its previous outlook had it received the products that were delayed.

Horowitz said “we had a lot of momentum the last time we spoke with you [in November on third quarter earnings results] heading into December [and we had] great reception to our fall and winter product. We just did not have the inventories to keep up with demand.”

Horowitz described one scenario to show how little control apparel firms have connected to certain Covid challenges: “You have a ship that leaves Southeast Asia that has berthing rights, a U.S. port, and by the time the ship gets here, the U.S. port has changed hands and that that ship is no longer accepted at that particular port…. [T]he reason I’m bringing up this very specific example is that’s a great way to show you that our team did everything they could to mitigate this circumstance all year. They were terrific at getting product here. Sometimes things just end up out of your control.”

As for inventory levels, CFO Scott Lipesky told conference attendees that one of the biggest takeaways from Covid is having “lean inventory management and the ability to do more with less.” He emphasized that the company is managing through current supply chain challenges.

“We are not going to lose that discipline around inventory that puts us in the best position, along with great products that deliver high AUR [average unit retail] at good gross margins,” Lipesky said.

 

American Eagle Outfitters Inc.

American Eagle is chasing $5 billion in annual revenue and the company has raised its Fiscal Year 2023 revenue target to $5.8 billion from $5.5 billion. The company said its expects record fourth-quarter revenue with growth in the mid-to-high teens versus last year, and up in the mid-teens from the same 2019 quarter, due to strong demand and positive pricing.

Jennifer Foyle, the company’s president and executive creative director, spoke about the American Eagle as a “denim destination” and how new fits and silhouettes, along with a new denim cycle, provides “lots of opportunity” ahead.

As for store operations, CFO Mike Mathias said the retailer will close doors over time, but that flexibility in lease terms will be key. “At any given point from here on forward, we’ll have 35 to 40 percent of our fleet coming around for potential lease actions,” he said, adding that there are about 200 doors that could close or be repositioned.

On the inventory side, the company got the product it needed, but it came at a cost.

“We really had a great holiday. Now, it came at a price because we had to air a lot of product due to the Vietnam factory closures. But that’s a decision we made last fall and that’s a decision, frankly, we’d all make again to make sure we continue the momentum in our business, we keep our customers engaged in our brands, and we really view it as an investment in the long term health for our brand,” Michael Rampell, chief operating officer said. “You know, we all hope the situation will get better and that’s certainly the case. We’re not dealing with factory closures right now. We all have factories that are open. All our mills are open so we don’t have that kind of disruption. But the variability in supply chain has been persistent, and it’s still less predictable than we’d like for it to be. But you know this is something we’ve been dealing with really for the last couple years. And as long as we don’t have mass factory closures like we had at the end of Q3, I feel very good about how we’re positioned in22.”

 

Torrid Holdings

Executives on the call for plus-size retailer Torrid said the brand started the fourth quarter strong, but was adversely impacted by Omicron.

George Wehlitz, CFO, said the retailer has seen some challenges beginning in late December.

Specifically, we’ve seen a slowdown in our productivity, increase in our absenteeism and our distribution centers and in our stores. That’s impacting our ability to actually process orders out to the customers from a DC (distribution center) perspective. It has limited what we can process from a distribution standpoint for e-commerce,” he said.

Wehlitz said the company is trying to be flexible with staff and scheduling, as well as doing more ship from store, to make sure everyone stays safe, but acknowledged that there are limitations to what it can do. He also said some sales in the fourth quarter will probably shift into the first quarter as it deals with its ability to ship orders out, and because of store closures and reduced hours. And while the consumer is still shopping and engaging with the brand, the CFO said consumer demand has been softer due to Omicron.