April 7, 2020

Retailers Fight For Survival During COVID-19 Pandemic

by Jharonne Martis.

The worldwide COVID-19 pandemic has caused many retailers to close their physical stores, causing a sudden increase of excess inventory. Nike alone saw an inventory spike of 7% in the fiscal quarter ending February 2020. Retailers are turning to different measures to keep business afloat.

Almost half of the online merchandise for U.S. mall stores is on sale this week. Refinitiv discovered this in a collaboration with StyleSage, which analyzes retailers, brands, online trends and products across the globe. The discount penetration (how much of the assortment is on sale) rose to 48% from 43% the previous week. The U.S. mall average percent discount is also up from a year ago. Whether this trend in the U.S. will spill over into other geographies and retailers remains to be seen.

Meanwhile, some retailers are trying to keep labor expenses under control as the coronavirus pandemic prompts a surge in layoffs and hiring freezes. To track these trends, Refinitiv partnered with LinkUp, which tracks global job listings across companies.

Health and wellness habits

During this public health crisis, wellness is at the forefront of consumers’ psyche as they continue to shop online for sports and activewear. “Consumers are looking to health and wellness now more than ever. Whether it’s to stay in shape at home or with a focus on mental health in stressful times, people all over the globe are finding ways to make sport a daily habit wherever, whenever and however they can,” according to Nike. (Source: Nike Q3 2020 earnings call, March 24, 2020).

Recently, Nike reported its Q3 2020 earnings for the period ending February 29. The retailer beat sales expectations, as revenue grew 7% over the last quarter. However, the retailer also saw a spike in costs that hurt profits, and inventory increased by 7% to $5.8 billion due to the impacts of COVID-19 in China. Recently, Nike offered a sitewide 25% discount in the U.S. to incentive digital traffic, which is not typical for them.

In a collaboration with LinkUp, which tracks global job listings across companies, Refinitiv tracked a surge in layoffs and hiring freezes around the globe. Digging into this employment dataset, there are some interesting findings when looking at the LinkUp data alongside the Refinitiv I/B/E/S Mean Revenue Estimate (consensus) and Refinitiv StarMine SmartEstimate®.

Nike cut some jobs in mid-February, slightly before the Refinitiv Consensus started getting bearish. Notice in the exhibit below how the Refinitiv SmartEstimate preceded that job scale-back. Afterwards, Nike pulled even more jobs in mid-March, after analysts polled by Refinitiv had been getting even more bearish. Accordingly, Nike’s revenue for the quarter ending February 2020 came in below the company’s previous guidance.

The SmartEstimate is a weighted average of analyst estimates, with more weight given to more recent estimates and more accurate analysts. Our studies have shown that when the SmartEstimate differs from the I/B/E/S mean by by more than 2%, the company is likely to post subsequent earnings surprises directionally correct 70% of the time. Revenue SmartEstimates® are even more predictive of surprises, with a historical accuracy rate of 78%.

Exhibit 1: Nike Unique Job Count vs. Refinitiv Revenue I/B/E/S Mean and SmartEstimate

Source: LinkUp data, available on Battlefin Ensemble Platform

Analysts polled by Refinitiv have been lowering their outlook estimates for Nike’s revenue, EBITDA, and EPS. The StarMine Analyst Revisions Model (ARM) is highly predictive of both the direction of future revisions and price movement. Nike scores a 19 out of a possible 100 suggesting that analysts are likely to revise earnings estimates downward. Notice in the graph below how the StarMine ARM has been leading Nike’s drop in stock price for most of 2020.

Exhibit 2: Nike’s StarMine Analyst Revisions Model Score vs. Stock Price Performance

Source: Eikon

Similarly, when looking at the LinkUp data for Lululemon, it looks like the retailer had been gradually trimming jobs since December, though not by a significant amount. The Refinitiv I/B/E/S Consensus had been steady until March 15 when the bulk of retailers, including Lululemon, announced store closures in the U.S. and Europe.

Consequently, the Refinitiv Revenue SmartEstimate took a nose dive. For the current fiscal quarter ending April 2020, the SmartEstimate differs from the I/B/E/S mean (consensus) by -5.79% (more than 2% difference). This implies that the company is likely to miss its current revenue estimate and post a negative surprise. Lululemon is known for attracting shoppers with its free fitness classes into its physical stores, and is now losing that direct customer engagement and revenue with its store closures.

Exhibit 3: Lululemon Unique Job Count vs. Refinitiv Revenue I/B/E/S Mean Estimate and SmartEstimate


Source: LinkUp data, available on Battlefin Ensemble Platform

Accordingly, analysts polled by Refinitiv have also been lowering outlook estimates for Lululemon’s revenue, EBITDA, and EPS. Still, when looking at the other StarMine models, there are some bullish indicators suggesting that Lululemon has the financial strength to weather the coronavirus storm better than its peers (Exhibit 4). Looking at the StarMine Earnings Quality model, Lululemon scores 87 out of a possible 100. Its high score suggests that profits could be from sustainable sources. The company’s cash flow and operating efficiency components also look healthy.

Moreover, Lululemon has a StarMine Smart Ratios Credit Risk model’s Model Implied Rating of AAA, which is above investment grade. It also has one of the highest StarMine Combined Credit Rank scores among retailers with a region percentile score of 96.

Exhibit 4: Lululemon StarMine Model Scores


Source: Eikon

Sportswear discounting

Nike and Lululemon have been the strongest performers within the sportswear industry. However, StyleSage, which tracks global online trends, has also noticed an uptick in discounts, including global activewear retailers in the U.S., U.K., Germany, Italy and France. Globally, active and sportswear saw discount penetration increase last week, by roughly five percentage points. Average discounts were also up, but just slightly. When it comes to strong popular trends, including athleisure, consumer loyalty makes a big difference for the bottom-line during weak economic periods.

Nike emphasized in its latest earnings call that discounting is not a new trend and not a reflection of the strength of their product. On the contrary, recently the retailers had some product launches that have sold through at full price. “So it will be a blend of working through inventory, which does have some impact on margin, and a blend of bringing innovation and fresh, compelling new product to consumers, who probably will be looking for energy and inspiration and optimism.” (Source: Nike Q3 2020 Earnings Call, March 24, 2020).

Exhibit 5: Sportswear Discount Penetration On the Rise:  Jan. – March 23, 2020

Source: StyleSage Co.

For active and sportswear, when we compare YoY% changes, apparel markdowns make up the bulk of the increase in markdowns, not shoes or bags. Nike said that demand for apparel merchandise was also strong, growing faster than footwear in the last quarter. Apparel markdown is a popular trend seen in other sectors as well, not just in sportswear. Clothing is much more likely to be discounted than footwear or bags.

Exhibit 6: Active Sportswear Discount Penetration and Average Discount –2019 vs. 2020

Source: StyleSage Co.

Shift to stronger online consumer spending

Nike said during its earnings call that digital sales have accelerated even more since the stores have been closed, suggesting that the COVID-19 outbreak might be conditioning shoppers to default more to online vs. physical stores.  As China was the first country to experience the COVID-19 outbreak, they have had more time in quarantine vs. other continents. Thus, Nike has now experienced the other side of the crisis in China after 5 to 6 weeks of closed business. What they are seeing is a total transformation of digital consumption. As shoppers return to the store and engage with their products, the majority of consumers are still going online to shop for products.

Accordingly, analysts polled by Refinitiv have been revising their revenue estimates upward for online retailer FarFetch’s, as it scores an 84 out of a possible 100 on the StarMine ARM score. The retailer also ramped up its job postings and hiring efforts towards the end of March. A lot of these job types include roles that can be filled while “working from home.” They might also be taking advantage of the fact that it’s a hirer’s market, and thus a good time to find good tech talent as the online digital consumption trend grows.

Exhibit 7: FarFetch Unique Job Count vs. Refinitiv Revenue I/B/E/S Mean Estimate and SmartEstimate


Source: LinkUp data, available on Battlefin Ensemble Platform

Meanwhile, in the U.S., the luxury department stores have dialed up what’s on sale, as well as the average percent discount since last week, according to StyleSage.  Notice in the graph below how the amount of merchandise on sale has gone up from 12% to 16% over the past week. However, in the European market, they have remained stable from last week. As the luxury sector tries to preserve the image of luxury, only time will separate the strongest from the weakest.

Exhibit 8: Average Discount Penetration For the Luxury Sector Per Country

Source: StyleSage Co.

U.S. mall stores

Meanwhile, almost half of the online merchandise for U.S. mall stores are on sale this week. The discount penetration (how much of the assortment is on sale) rose to 48% from 43% in the previous week. The U.S. mall average percent discount is also up from a year ago.  Whether this trend in the U.S. will spill over into other geographies and retailers remains to be seen.

There’s more discounting also happening online for U.S. mall stores. These retailers have seen a five percentage point increase in both discount penetration and average discount from last week. This is also a YoY % increase. This is troublesome as discount penetration and average discount are trending upwards for this sector consistently since the beginning of March, and thus can have a negative long-term effect on profits.

Exhibit 9: Average Online Discount Penetration and Average % Discount for U.S. Mall Stores 


Source: StyleSage Co.

 To summarize, the coronavirus pandemic is definitely changing the world, the consumer and global economy. The unprecedented phenomenon is pressing companies, including retailers, to adjust by the second, and the Refinitiv fundamental data, in collaboration with alternative data partners StyleSage and LinkUp suggest that retailers are not lazy about their survival. Whether retailers offer discounts to move excess inventory or lay off employees to reduce labor related expenses, a prolonged pandemic will likely prove damaging for the financial health of businesses experiencing zero physical revenue.

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