Promotional activity seems to have increased over the last few weeks, with steeper discounting to boot–and that’s not a good sign for second-quarter earnings results.
First-quarter results were somewhat lackluster for many retailers, but some executives noted on recent conference calls that the early read for May, the start of the retail calendar’s second quarter, indicated that their sales activity and selling trends were showing signs of improvement.
So while fiscal year guidance, in many cases, were revised downward to adjust for first quarter results and perhaps a slow start to the second quarter, there was at least some tempered optimism for the year ahead.
According to Wells Fargo’s retail analyst Ike Boruchow, “Following a volatile [first quarter] and a very tough May, we believe retail turned ‘less bad’ in June, though trends overall remain far from robust and were likely promotionally driven.”
The analyst cited same-store data from ShopperTrak, which noted that foot traffic improved sequentially. He also said, however, that it appeared promotional activity was “stepped up significantly” in May, and seemed to have persisted in June. That suggests retailers had to step up the discounting to get consumers to check out the sales. At this point in the second quarter, retailers are likely to get aggressive with their discounting to clear out inventory to make room for back-to-school and early fall merchandise.
The cooler temperatures in May and June haven’t given consumers any reason to shop for summer apparel either. And citing a forecast from Weather Trends International, Boruchow said the expectation is that weather in July stays cooler than usual. Given that we’re already into July, with just a few weeks left of the month before the second quarter ends, Boruchow has already concluded that “it’s too late to salvage” the quarter. Already, he said, last month correlated with the “second highest ‘more’ promotional percentage since October 2017, with the only more promotional month being May 2019.”
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With higher promotional activity, and possibly more inventory left to sell than most retailers would like, Boruchow said margins and inventory levels at the end of the second quarter could be top-of-mind for many retailers at the start of the third quarter and the back-to-school selling season.
Companies like Farfetch, athletic-focused companies like Lululemon Athletica and the off-price sector, according to Boruchow, are three areas that have been able to weather the promotional environmental at retail. VF Corp.’s The North Face and Vans have shown the most promotional restraint in the second quarter, while Capri Holdings Ltd. and Tapestry Inc. showed more promotional pressure in the quarter via Michael Kors factory stores, Coach factory doors and Kate Spade full price and factory locations, Boruchow said. Fossil Inc. showed even higher levels of markdowns.
So how steep were the promotions?
According to the analyst, Kate Spade ran its Surprise Sale, which included up to 75 percent off and an extra 10 percent for purchases over $150, while Ralph Lauren’s full price stores had a promotion that was 30 percent off purchases of $150 and more. At Fossil, the company was offering a spring sale of up to 40 percent off, along with a flash sale on watches and bags starting at $95 for a week and a half, and in the same quarter a year ago, there was no such sale.
Morgan Stanley’s retail analyst Kimberly Greenberger noted that second quarter traffic trends to date fell 5.3 percent year-over-year, in line with the first quarter pattern and, she said, choppy traffic trends in general “could prompt incremental year-over-promotions.”
According to Greenberger, promotional activity widened the most at retailers like White House|Black Market, which was 60 percent to 65 percent off this year versus 5 percent last year; American Eagle Outfitters, 70 percent to 75 percent versus 30 percent to 35 percent a year ago; and Hollister at 50 percent to 55 percent off versus 20 percent to 25 percent in the same year-ago period.
As for clearance sales, Michael Kors’ retail stores offered sales between 25 percent to 30 percent off, plus an additional 40 percent off, versus a 15 percent to 20 percent discount a year ago. Ann Taylor’s Loft stores were 20 percent off , with an additional 60 percent discount for clearance items, versus just 10 percent off a year ago and 50 percent off on clearance merchandise. This year, Old Navy offered customers $10 off a $50 store-only purchase with a mobile coupon. And Nordstrom Inc.’s credit card holders were able to earn $30, $60 or $100 bonus notes redeemable in the third quarter on purchases of $150, $250 or $400 in full-line stores between June 26 and July 2.
Promotions at various retailers have increased this past weekend versus a week ago, and, according to Dana Telsey of Telsey Advisory Group, they are also up from the year-ago discounting at some stores.
Abercrombie & Fitch’s summer sale is now 60 percent off versus 50 percent off the week before, compared with between 40 percent to 60 percent in the same year-ago period. Anthropologie’s Summer Tag sales is now an extra 50 percent off on sale items versus an extra 30 percent off the week prior and an extra 25 percent off last year. Urban Outfitters has its traditional sale offer, but it has increased to an extra 40 percent on sale items, compared with an extra 30 percent off sale merchandise a year ago.