Stripping consumers of their last reasons to buy new clothes — the need to dress up for work or play — was not exactly what the apparel industry needed, in light of the sector's already ebbing growth and cloudy future. But that was exactly the environment created by the pandemic in the last several months, leaving retailers to scramble to change their assortments, store protocols, inventory management and fulfillment services.
For some, that paid off in the third quarter.
It's been brutal, month after month, with the segment suffering a series of year-over-year declines. In March apparel sales fell 52.5%, in April they plunged 89% and in May they were down 63.7%. In subsequent months the declines moderated, though they would be considered significant in any other year: June down 25%, July down 19.9%, August down 23.7%, September down 13.1%, October down 12.1%.
That's how overall sales went. It was already apparent by the second quarter, however, that some individual clothing retailers are doing better than others. Now as several specialty apparel retailers and department stores report on their third quarters, some may be staging a comeback.
"Q3 was much better and the trend is improving," GlobalData Managing Director Neil Saunders said by email regarding apparel sales. "This now leaves the department stores as the one part of retail that's really struggling."
Abercrombie & Fitch Co.
The largely mall-based clothing retailer saw mixed results in the quarter, with sales at its namesake brand (41.8% of total sales) down 2% to $343 million, while sales at Hollister (58.2% of the company's sales) fell 7% to $477 million. Overall, net sales were down 5% to $820 million, as e-commerce rose 43% to $382 million, the company said in a presentation to analysts. Net income was $42.3 million, with gross margin expanded by 390 basis points and costs down, beating many analysts' expectations.
While the overall sales decrease also beat analyst expectations, the steeper decline at Hollister may have surprised some. The more casual, less expensive brand has prospered in recent years while Abercrombie struggled to break away from its exclusionary, cool teen vibe to appeal to maturing millennials. Hollister still out-performed other apparel brands, but the relatively better success at its sibling shows that these days, it's not enough for apparel to be "casual."
"[W]hile Hollister is known for its relaxed and everyday style, it is less associated with the cozy vibe which explains its relative underperformance to its sister brand," GlobalData's Saunders said in emailed comments Tuesday. "The recent focus on very soft, high quality materials and linings has helped Abercrombie to stand out in a market that has become more crowded with these sorts of garments."
American Eagle Outfitters
Mall-based brand American Eagle has the benefit of a growing lingerie business, Aerie, that has been bringing new customers to the namesake banner and just happens to offer many of the cozy styles that are so in demand.
Third-quarter total net revenue fell $35 million or 3% to $1.03 billion, largely due to "mall traffic declines related to COVID-19, offset by strong online sales," according to a company press release. By brand, American Eagle revenue fell 11%, with e-commerce up 11%, and Aerie revenue rose 34%, with e-commerce up 83%.
Gross profit rose to $415 million from $407 million last year, as net income fell to $58.1 million, from $80.8 million, with a $7.9 million interest expense siphoning profits.
In emailed comments, Saunders said the apparel retailer "is on a clear path to recovery," but noted its two brands' topline results indicate they appear to be on different trajectories.
"Looking in more detail at Aerie, we remain impressed by the brand’s traction with consumers," Saunders said. "Not only is Aerie selling more to existing customers, it has also been incredibly successful in attracting new shoppers. Compared to more established peers like Victoria’s Secret, Aerie is still a relatively immature retailer and so some degree of brand discovery by new consumers is normal. However, the pandemic has accelerated this significantly and Aerie is picking up a substantial amount of market share."
The off-price retailer put forth a strong third quarter, much like rivals TJX and Ross in similar time periods. Total sales fell 6% to $1.7 billion, as comparable store sales declined 11%, beating analyst expectations in both measures. Gross margin expanded to 45% from 42.4% last year, thanks to lower markdowns and higher markup, which were partially offset by higher freight costs, according to a company press release.
The company struggled a bit more with inventory than did the other off-price retailers, according to BMO Capital Markets Managing Director Simeon Siegel. "Comparisons to [TJX and Ross] suggest [Burlington] is slightly lagging peers and we continue to believe inventory is constrained rather than disciplined, but helping margins," he said Nov. 24 in emailed comments.
Speaking with analysts the same day, CEO Michael O'Sullivan pushed back against any notion that the problem is a long-term concern, however, saying that merchandise supply for all off-pricers is "always a little lumpy." In fact, he characterized off-pricers as partners to vendors, brands and other retailers, which can off-load their own inventory miscalculations into the off-price pipeline, he said. Furthermore, as more clothing is sold online, Burlington is likely to see an ample and diverse inventory to choose from, he said.
MKM Partners Managing Director Roxanne Meyer agrees, noting that online apparel pure-players grapple with returns of some 30% but have no outlet model to sell through. "Part of off-price retailers' advantage comes from the shrinking of the department store — all of the vendors that sell to department stores need to sell that product somewhere else — and part is a function of online growth," she said by phone. "The harder it is to plan your inventory accurately, it only gets better for off-price."
Chico's FAS's Soma lingerie line was a standout in the third quarter, with comps up 10.5% year over year. But its namesake brand (down 32.3%) and White House Black Market brand (down 28.7%), dragged overall company comps down 24.1%.
Net sales fell 27.5% year over year to $351.4 million, although that was an improvement of 14.8% from the previous quarter, "reflecting robust digital performance and rebounding store revenues," according to a company press release. The company's net loss widened to $55.9 million from $8.1 million a year ago. Gross margin was $77.2 million, or 22% of net sales, up 740 basis points from the second quarter. But that figure was down 1,397 basis points year over year, according to a B. Riley note.
CEO Molly Langenstein emphasized to analysts that the company is shifting to become a "digital first" retailer, according to a Seeking Alpha transcript; overall in the quarter the company saw double-digit digital sales growth, with Soma's e-commerce up 67%. Yet, according to its press release Tuesday, Chico's is still operating 1,310 stores in the U.S. Its results suggest that, online or off, the company isn't offering the clothing that people want to wear right now.
"We believe the revenue decline was due to depressed store traffic and lower demand for CHS product during the pandemic," according to emailed comments from B. Riley analysts led by Susan Anderson.
Sales of face masks, a key item that health officials say is one of the best ways to protect against spread of the coronavirus, lifted all Gap Inc. major brands, including Banana Republic, Old Navy, Athleta and Gap itself.
But GlobalData's Saunders called Old Navy the "hero" of the quarter. The discount brand, which had been set to be spun off last year but had to stick around after several quarters of faltering results, returned to its previous status as the company saving business, with third-quarter net sales up 15%, and comparable sales up 17%. Three-quarters of Old Navy's stores are in off-mall locations, which the company in a press release touted as a key advantage.
At Athleta, the company's small but quickly growing activewear brand, net sales rose 35%, and comps rose 37%, the highest in its history according to the company, with e-commerce's contribution above 50% in the quarter.
The two other major brands in the portfolio didn't fare quite as well. Net sales at namesake Gap were down 14% and comparable sales were down 5%, reflecting a reduced store count and lower traffic, "partially offset by strong online performance." At Banana Republic, which has had to quickly pivot away from its core workwear offer as people work from home, net sales fell 34%, and comparable sales fell 30%.
Overall the company did well in the period, though, with net sales flat, "reflecting a 61% increase in online sales, offset by a 20% decline in store sales." E-commerce contributed 40% of the company's sales, getting it closer to its overall goal of 50% e-commerce by the end of 2023.
Company comps rose 5%, driven by that digital strength, "which added over 3.4 million new customers," per the release. Net income reached $95 million, from $140 million a year ago, though the company's net loss sits at $899 million for the year so far.
"Considering all the disruption caused by the pandemic and the weak results over the prior two quarters, this is a very good set of numbers from Gap Inc.," Saunders said in emailed comments. "This is particularly so in the US where overall sales grew by 2.3% over the prior year. In normal times this would be a reasonable uplift, however, in the current trading period it is an exceptional outcome and shows that, as a whole, the business is gaining market share."
At Urban Outfitters, which runs apparel brands, (selling through wholesale, retail and its Nuuly rental site), and a pizza chain, said that total third quarter net sales fell 1.8% year over year to $970 million, while net income rose 38% to $76.7 million from $55.7 million a year ago.
Retail comps were flat in the quarter, due to negative brick-and-mortar sales, lower store productivity and reduced store traffic, "offset by strong double-digit growth" online, according to a company press release. By brand, retail comps rose 17% at Free People and 4% at Urban Outfitters, and fell 9% at Anthropologie. Wholesale segment net sales fell 24%.
Gross profit rose by 79 basis points year over year, thanks to "record low merchandise markdowns" in the retail segment, with improvement at all three brands, the company said. Inventory was down 8% by quarter's end.
In a quarter that bested analyst expectations, the company demonstrated its advantages, including that, while its apparel brands differ somewhat, they all offer the comfortable styles people favor at the moment. Its relatively new Free People Movement activewear line is in another in-demand category. In fact, CEO Richard Hayne told analysts Monday, per Seeking Alpha's transcript, that Movement, which opened its first stand-alone store last month, "has the potential to become a billion-dollar brand and [we] plan to invest in its growth aggressively."
The company's "results demonstrated ongoing inventory management and merchandise execution, particularly in stay-at-home related categories," MKM's Meyer said in a Nov. 24 client note, in which she also called Free People Movement "an attractive growth opportunity," pegging the line's current sales at $100 million.