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Retail Conference Learnings: Visitation Trends Improve in July and August

Thomas Paulson
Sep 9, 2022
Retail Conference Learnings: Visitation Trends Improve in July and August

This week, many of the largest retailers were heard from at the Goldman Sachs Retail Conference. In general, management teams shared a cautiously optimistic tone for the 2H22 given recent improvements in traffic (below), engagement, and conversion. Discretionary demand is largely tied to newness (i.e., retailers that have good inventory turns and flow that aren’t over-inventoried with “unwanted stuff” now find themselves in chase mode), which was a theme that we broadly heard when fiscal 2Q22 results were reported in August. Hope persists by management teams that inventory levels will substantially improve by 4Q22, allowing for the amelioration of promotions. We are more cautious on that hope, as unemployment and consumer angst may be higher due to the troubles in Europe, ongoing lockdowns in China, and higher interest rates per the Fed. However, we are more hopeful for 2023 as 4Q22’s seasonality and January clearance should burn through remaining excess inventory putting most retailers back in chase mode; YoY inflation rates should ease, real income should increase, discretionary cash flow should be up, and comparisons (to 2022) should ease. Goldman's economists forecast discretionary cash flow to be up +5% in 2023, versus it being down -4% in 2022. (It increased +8%-9% in 2020 and again in 2021).  At the conference, almost 60% of the retail management team's surveyed expected the consumer to be the same or stronger in 2023 compared to 2022, and 70% of retailers target higher normalized margins in 2023 (compared to 2019).

In addition to the better tone by retail management teams at the conference and Placer.ai traffic, Bank of America credit card data also shows that sales were stronger across a broad swath of retail categories. However, September has started on a soft note, both versus 2021 and 2019. They concluded on back-to-school spending: earlier, but not stronger. Our view: the dip is more a function of sentiment as household finances, for most, remain in fine standing (below) as does the labor market. At this point, our outlook for holiday spending is for a “robust period” for those retailers that can present “newness.” This is clearly what Apple is trying to latch onto with this week’s announcement of iPhone, Apple Watch, and Airpod Pro.

Below, we've complied some key retailer-specific takeaways from the event:

Promotional Environment Starting to Normalize?

We were pleasantly surprised to hear several retailers across the beauty, broadlines, and sporting goods categories describe a return to a more normalized promotional environment. Excess inventory overhang remains for general merchandise and apparel across the industry, broadly. Thankfully, most retailers expressed a lessening of supply chain challenges, although not back to normal yet.

Importantly (and less well understood), supply chain challenges are part of inflation with Tractor Supply noting that about one-third of the total inflation it has seen over the last 18 months has been due to the supply chain. Its average ticket size was up +7.5% in 2Q22. Assuming that one-third of that, or 2.5%, was added supply chain cost (i.e., waste), then correcting those inefficiencies may lead to a 2.5% offset to the structural inflation that will roll over into 2023. As the roll-over component in 2023 will be less than what was built up during 2022, that could lead to a faster deceleration. We are hopeful and on the watch for this dynamic (average unit retail versus fully-loaded average unit cost). Substantial supply chain investments made during 2021 and 2022 will also be a driver to a positive spread.

Mass Merchants Make Better Brand Partners

Carters had a more optimistic tone on the demand trend at exclusive brand partners Target and Walmart, where trends tied to essential grocery trips appear to be stronger than discretionary wholesale partners. This is not a surprise and we suspect that this will be an ongoing force for more store-in-store partnerships over the next year.

Back-to-School Trends and Apparel Inventory Position

Target’s CEO Brian Cornell and CFO Mike Fiddelke were upbeat about back-to-school and back-to-college performance as customers engaged earlier and responded to newness. The company is near completion of clearing its excess inventory, while the markdown overhang in 3Q22 is primarily in apparel.

Back-to-School / Sephora at Kohl's Update / Real Estate Moves?

On back-to-school, Kohl’s observed that denim and uniform performance have been soft but performance met management expectations overall. Going forward, Kohl's plans to take a more conservative approach against a challenging macro backdrop, especially with inventory, and will run the business under a "chase" mode if they see the macro environment start to improve in 2023.

All commentary on Sephora was positive and consistent with its prior statements; one-year Sephora at Kohl's doors are outperforming the remainder of the fleet by high-single-digits. CFO Jill Timm newly shared, that “[sales at] the 400 doors that we just opened in 2Q22 outperformed the balance of the chain by that same mid-single-digit.” Placer.ai data indicates that visits to the April and May openings (140 remodels) were comparable to the rest of the chain this summer on a nationwide basis (though improving each month), suggesting that the announced outperformance might be explained by a higher conversion rate and/or higher ticket at the remodeled locations.

On real estate, management is running a competitive process to determine if it makes sense for Kohl’s to do a sale-leaseback on their owned assets. Timm added, “We've reached out to probably 20 different parties. We're understanding what are the cap rates available to us, what are the rent escalation clauses and what are the lease terms? I want to make sure that I do a deal that gives us the financial flexibility to run this company for the long term."

State of the Consumer and the Relevance of the Physical Store

On its consumer, Macy’s CFO Adrian Mitchell shared, "As we think about the consumer today, we think the consumer is still relatively healthy, especially going into a slowdown. But what we saw in the second quarter was a situation where all income tiers for our Macy's brand actually saw a slowdown, particularly in the back half of the second quarter. As we think about kind of what we came into the year planning, we really planned a lot of our, for example, pandemic categories down. But surprisingly, some of those categories actually slid down faster than we had expected. At the same time, our luxury customer as we look at the Bloomingdale's brand, looking at the Bluemercury brand, they've been very resilient. What we continue to see is strong momentum that's outperforming last year. As we think about the consumer, we're very much focused as we get into the fall season on continuing to be very relevant. And the kinds of things that we're focused on as we think about the fall season is having inventory available for that customer so that they can transact on the right stuff…This year, we want to make sure that we have that inventory early enough to be available for the customer as we lean into that holiday season. The second thing for us is really the right composition of inventory. There are parts of our business that are really on fire. Those occasion-based categories, the dressy categories, the shoes categories, the fragrances categories, those are really on fire. There's a composition element that we think is actually quite important right now. We'll continue to lean into freshness as we get into the back half of the year...and that requires really looking at the item-level SKU velocity, really understanding the demand, really being thoughtful about the inventory we have on hand and in transit and just being super disciplined. As we look at 3Q22 so far, the good news is we're still on track with the outlook and guidance we provided in our 2Q22 earnings update. Coming out of Labor Day holiday, the first month was certainly what we expected. We're pretty pleased with that." (As a reminder, Macy’s plan for 2H22 is a low-single-digit comp decline which looks to be where they are tracking based on our visitation data, and with Bloomingdale’s outperforming the Macy’s brand. In addition, Macy’s inventory position is healthy, and it is in chase mode.)

On the relevance of the physical store and Macy’s exploration of small-format, Mitchell shared, “When you look at the economics and the trends that are happening, we do see that physical footprint is actually quite relevant. From a mall-based standpoint, we're rightsizing that portfolio. We announced 6 closures at the beginning of the year. We now have 7 closures this year. But on the off-mall side, we're really pleased with what we're seeing with the customer response. We have stores in Dallas, and we have stores in Atlanta. We're very pleased with the response. Even Johns Creek that recently opened up a little over a month ago, sales are exceeding expectations and customer feedback has been very strong. We're really kind of locking in that formula."

Mitchell also described three pieces to the company's physical store strategy: "The first is what we call in-fill densification. If you think about the Atlanta market, it has 11 full-line stores. We now have 3 Market by Macy's. We're seeing a higher composition of new customers than full-line and a higher composition of under-40 customers than our full-line stores. We're really kind of looking for sub pockets of demand within that market through a convenient location that's sorted appropriately for that local neighborhood and that local market. The second strategy is what we call the replacement strategy. We just announced the closure of our Chesterfield store in the St. Louis area, 2 miles where we're opening up a Market by Macy's store. We're going to be moving the customer at the same time we're closing from one full-line underperforming store to the Market by Macy's store. The reason that's critical is we want to maintain a physical presence in that market. There are many markets we've exited over the last 6-7 years, but we want to maintain a physical presence…because we know the spend profile for customers when they're in the store and digital is much higher than when there's only digital. The third [strategy] is really entering new markets or going back to markets that we've exited, where we're only digital only. You think about Jacksonville, one of the top 50 markets in the country. We don't have a store there. We see in the digital data that there's opportunity there. How do you think about Jacksonville and other markets that we may have exited or have never entered as an opportunity for us to really get into those markets and really take advantage of opportunities to grow the business? New customers, diversification, but the omnichannel footprint is really critical. I think the biggest thing when you think about the small format is it gives you flexibility. There are certain markets that don't have the population of the demand to be able to build a 200,000 square-foot full-line store, but it can absorb a 40,000 square foot Macy's store."

Higher-Income Customers Trading In? / Healthcare Update

Dollar General CEO Todd Vasos discussed the chain's market share gains, “Our core customer makes $40,000 or under a year. That next cohort is in that $40,000-$60,000 range, if you will. And then the next cohort up is that $60,000, $65,000 to $75,000 to $100,000 kind of a range. What we're seeing this time around is interesting. We gained so many customers during the height of COVID. We retained so many more customers than we thought we would coming out of COVID, and the majority of those customers seem to be in that cohort that's adjacent to our core, so up to that $50,000 to $60,000 range. What we're seeing trading in now at the end of 2Q22, the highest trade-in that we've seen and the most robust has actually been between the $75,000 and $100,000 group. We'll have to wait another couple of periods to see, but we believe that that phenomenon is happening for two reasons. Number one, we've already gotten a lot of those next cohort up and we were keeping them from the pandemic. But also secondly, we believe that, that next cohort up has shopped us during COVID and knew about us and is now trading back in because they liked what they saw.”

On Dollar General's healthcare initiative, President and CFO John Garratt shared, “But what we've heard from the customer...is that customer is really seeking access to healthcare. And just like these customers, many of our customers are in food deserts. They're in healthcare deserts, too, where they have to go a long way to get that access, and they don't. They don't seek that access and you have bad outcomes. We really see an opportunity and the customer is excited about it. We've talked to payers and providers. We see a big opportunity, a big solve, particularly for rural America, where it's really hard to bring health care to these customers, these tough-to-reach places. Our unique footprint really lends itself well to that. We’ve been very busy looking at different opportunities to service the customer through the health care services… [and] we're looking at it is asset-light, technology-heavy leveraging partnerships… and through our services to be more of a one-stop shop in areas where others can't reach." (As a reminder, Garratt is on the board of Humana.) We discuss the increasing competition among retail healthcare
here.

Market Share Gains / Expansion Plans / Inventory Supply

Grocery Outlet’s CEO Eric Lindberg shared that the brand has really taken share from conventional grocers this year in California. (As a reminder, Outlet seeks to offer prices at 40% lower than conventional grocery players and 20% lower than discounters.) Placer.ai data (below) shows substantial traffic growth for it and Food 4 Less, and sizable traffic declines at Vons, Ralphs, Albertsons, and others. Given the consistency between price point banners, it would appear that Grocery Outlet’s gains reflect strong execution on a macro-afforded opportunity. That opportunity is likely to last as long as the macro- does, or in the current environment, as long as food inflation continues to press upwards. Also of note, Placer.ai data suggests that Sprouts Farmers Market is getting squeezed in California.

Lindberg also discussed Grocery Outlet’s new customers, "We get them in the store and keep them...They're looking to try and stretch their dollar in that one-third of food that is very expensive...so we're delivering value in a very different way. People tend to come back. That treasure hunt starts to take hold after two to three visits."

On expansion Lindberg reiterated, "We're at 430 stores effectively with literally decades of growth at a double-digit [unit expansion rate] to sort of fill out what we think is the potential,” which they’ve sized at 4,800. On the store and independent operators (IOs, which are similar to a franchise model), he shared, “The independent operator (IO) has the ability to merchandise separately inside their store, the way they see fit to sort of meet the local consumers. So you will walk in, you'll feel the branding elements are the same, but you feel the merchandising is a little bit different. You feel selection [is] different. In terms of what we're adding in new markets, it's the same package...Then you've got nuances in produce, you've got inflections where you've got things in the West Coast that sell better than the East Coast and those regional differences."

On supply of liquidated and closeout goods to fill those stores, President RJ Sheedy shared, "It's a large and growing pool of supply, it grows pretty consistent throughout our history, and we'll continue to grow. We're a significant player in the space, but it's still quite fragmented. As we've grown, we've gained share, but lots of share is still to be gained. If you think about why this product exists in the first place, generally, supply chain imbalances, supply chain disruptions, and imbalances between supply and demand. There's certainly been a lot of that this year, so the pipeline has been quite healthy and robust. You've got product innovation, you have packaging, branding, you always have changes there. Shelf life, of course, just managing a shorter shelf life as products become fresher and more natural, et cetera. Exclusive brands for retailers that get canceled short and things like that. There are lots of inputs into why opportunistic or surplus inventory exists and our jobs are to be the preferred retail partner for our supplier partners. We do business with all suppliers from the largest CPGs. We've had relationships that go back decades. And a lot of our effort recently has been to build those relationships with smaller emerging companies."

Strong Year for Weddings

For a more “joyful” outlook, Signet shared that about 2.5M weddings will take place this year, a 40-year high, compared to a normal run-rate of 2.0M-2.5M a year and the company expects another strong wedding year next year as many venues are fully booked for this year. Vegas anybody?

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Thomas Paulson

Director of Research and Business Development, Placer.ai

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more.

He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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