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Themes from this Week's Retailer Updates

RJ Hottovy
May 19, 2023
 Themes from this Week's Retailer Updates
  • Consumer spending on goods softening further, trade-down is apparent, and consumers are buying closer to need. The consumer malaise that became more evident this week doesn’t appear to have any geographic concentration and the California banking crises appears to not be an issue for that region. The consumer is just getting worn out by higher prices on everything: food, insurance, rent, repairs, vacation travel, etc. Additionally, pandemic pull-forward effects continue to be revealed as larger than was realized, be it large flatscreen TVs, washers & dryers, or casual athletic footwear. Households have plenty of these goods. Retailers reporting this week said that consumers are shopping closer and closer to need and only when prices reflect deep value. To our eyes, deflation in non-consumables goods appears imminent.  
  • Visitation trends continue to moderate.'s visitation data has been relatively consistent with monthly retail sales trends; namely, March represented a step-down from February, April saw further declines year-over-year, and May trending in a similar fashion. These trends were consistent with commentary from Walmart, Target, and Home Depot.
  • Wage pressure is still an issue for earnings. Starting wages are in the $15-$24 per hour range across the country and paying for college tuition is becoming a common benefit for retail store, distribution center, and fulfillment center employees. However, it sounds like retailers reporting results this week have gotten turnover to a manageable level.
  • Theft is worsening. Theft had a meaningful impact on retailer results during 1Q 2023 and it is clearly a large frustration to management teams. We suspect that some of the issued is rooted in economic reasons (i.e., not enough money to eat). Recall our earlier story about food bank traffic.
  • Even the best positioned retailers are feeling some pressure. Lastly, what struck us in these reports is that the reporting retailers are some of the most successful, well-resourced, well-managed, fully omnichannel, advantaged operators in the country and their profits are being substantially hindered by slowing consumer spending, ridiculous levels of theft, and high business cost inflation. For less advantaged retailers, 2023 is going to be a very challenging and risky year.

Home Depot: Pro Customer Weakness Sounds Alarms, but Several Demand Drivers Remain Intact

Home Depot’s 1Q 2023 update this past week seemingly sounded alarm bells for retail industry, residential real estate, and the economy in general, as the retailer reported weaker-than-expected Q1 2023 results. We had previously looked at the moderation in demand among Home Depot customer’s due to increased price sensitivity, but the company acknowledged that demand fell below expectations during the quarter, which is evident in year-over-year visitation trends (below).

Like a lot of discretionary retail categories, we observed a shift in behavior in March, after the company’s Q4 2022 update and coincidentally right around the time of the Silicon Valley Bank failure (which, when coupled with other regional banking issues, may have had a larger psychological impact on the U.S. consumer than many analysts have acknowledged). For the quarter, Home Depot noted that its comparable average ticket increased 0.2% while comparable transactions decreased 5% (like previous quarters, we believe online transactions account for some of the difference between our in-store visitation data and the reported comparable transaction figure). Excluding core commodities, comp average ticket was primarily impacted by inflation across several product categories as well as the demand for new and innovative products.

Our focus on Home Depot’s last update was increased price sensitivity among DIY consumers. To that end, management called out weakness in a number of big-ticket discretionary categories (including patio, grills and appliances that likely reflects deferral of these single item purchases and pull-forward). Big-ticket comp transactions or those over $1,000 were down 6.5%, compared to the first quarter of last year. However, it was Home Depot’s Pro contractor customers that garnered the most attention this week. Management noted that Pro backlogs are still healthy and elevated (relative to historical norms), DIY customer transactions outperformed Pro customer transactions during the quarter. Moreover, there are a lower number of Pro projects than there were a year ago and the types of projects in these backlogs are changing from large-scale remodels to smaller projects (Pro sales also experienced a disproportionate impact as a result of lumber deflation and a wet start to spring negatively impacted both customer cohorts).

Historically, we’ve used weekday versus weekend visits as a way to evaluate Pro versus DIY visit trends, with weekday visits serving as proxy for Pro customer visits and weekend visits serving as a proxy for DIY visits. While this approach has directionally squared with Home Depot’s reported results in the past, 1Q 2023 was a bit more distorted because of the impact of inclement weather, particularly in western markets like California during March and April. According to management, “We didn't have many good weekends [in March and April] but when we did, sales were incredibly strong.” We see this in Home Depot’s daily visitation data presented below, where the weekends during March substantially underperformed the year-ago period. Adjusting for the Easter calendar shift in early April, we started to see weekday visits underperform weekend visits later in the quarter, and reinforcing management’s comments about a lower number of Pro projects and changes in the size of the project.

We can also see the impact of weather in the quarter looking at Home Depot’s nationwide versus California and San Francisco. According to the company, the impact of weather was most pronounced in these regions by a significant margin. As the region's adverse weather passed, one can see that the traffic softness lingered.

A decline in visitation trends played a part in Home Depot reducing its full-year outlook, with management now calling for a comparable-store sales decline between 2% and 5% (down from earlier expectations of flat growth), an operating margin rate between 14.0%-14.3% (versus previous expectations of 14.5%). Consumer price sensitivity is not going away anytime and will continue to be a larger consideration in consumer purchases this year. Still, when factoring the aging of the U.S. housing stock, and home values and housing equity that are still ahead of where they were before the start of the pandemic, we still anticipate visitation trends for this category to outpace historical averages in the years to come, even with 2023 being a down year.

Walmart and Target: Retaining Connections with Households Despite Less Spending


Walmart U.S. drove a +7.4% comparable-store sales increase during Q1 2023, with both ticket and transactions increasing and helping to lift its trailing-twelve-month sales per square foot from $619 to $628. Grocery was the key driver with Walmart posting grocery comps of roughly +12%, but the retailer also saw contribution from pharmacy due to sales of Eli Lilly’s Mounjaro (its weight loss drug). On the other hand, general merchandise in the store (excluding e-commerce) was down mid-teens as customers are shopping closer to need, trading down, and cutting back. Other headwinds called out by management included bad weather, lower tax refunds, and lower SNAP benefit payments (echoing sentiment from other retailers). Management indicated that they did not expect the business mix(i.e., an inflection in general merchandise sales) to materially improve for the remainder of the year. The company saw incremental slowdown in middle-income consumers--a cohort the company had made gains with during the back half of 2022--with concerns that wage growth could slow in 2H 2023 and yield a next-level impact on the lower-income consumer. For Q2 2023, management’s guidance implies another significant decline (low-teens) for general merchandise at stores. That rate of market decline will take a larger toll on Target given its greater sales mix (52%) in these categories.

As it relates to omnichannel, Walmart was able to produce another impressive +27% gain in e-commerce and a +40% increase in retail media advertising revenue. Recall from our Q4 2022 update that Walmart’s marketplace and its third-party fulfillment services are yielding significant adoption among third-party sellers (meaning it is offering consumers a wider selection) and its fulfillment speed (2-3 days) is increasing convenience and conversion rates (fulfillment by Walmart orders doubled year-over-year). That improved momentum draws in more sellers (+40% year-over-year) and shoppers which drives the flywheel. Walmart can monetize the increasing data coming out of that flywheel, be it through advertising or more topical and relevant merchandising decisions for the site and the individual stores and the markets in which they reside (i.e., better local relevance, which is hard to do at the scale of 4,900+ large format stores). Walmart has studied Amazon for decades, it knows the plays that have served Amazon well, and it has finally reached the inflection point play on scale.

Walmart was able to control expenses well, as selling, general & administrative (SG&A) expenses increased less than sales. Compared to 2019, comparable sales are up +29% and SG&A costs per square foot is up similarly. For most retailers, this is not the case given industry-wide inflationary cost pressures (Historically, Walmart has been better able to manage its overall wage cost pressure because of lower competition for workers in many of its rural markets). As it related to the competitive environment, Walmart CEO Doug McMillon said, “[We are] pivoting where our investments are more focused on capital investments than income statement investments (i.e., promotions). And we'll continue to proceed to invest in the supply chain (i.e., in-stock levels), [and remodels]…when I think of the word, investment, I think more about those things than I do necessarily income statement investments…[and] because inventory is in a better spot than it was last summer, for example, [we] can focus more on [being merchants] rather than just dealing with the flow of inventory that was coming in.’’ (In summary, Walmart is a position to strongly execute.)

We had titled our 4Q 2022 update Walmart’s 2023: Helping People Save Money and Live a Better Life because we expected Walmart to push back on nationally branded food manufacturers’ price increases in 2023 and to further ramp up its own supply of Walmart-branded packaged food offerings. When we didn’t hear about that at its recent investor meeting, we feared that we may have misread between the lines. We had not. Walmart and Target’s business and profit mix is under pressure because consumers don’t have enough discretionary dollars as high packaged food inflation keeps gobbling up their limited budgets. McMillion noted, “In the dry grocery and consumables categories like paper goods, we continue to see high single-digit to low double-digit cost inflation. We all need those prices to come down. The persistently high rates of inflation in these categories lasting for such a long period of time are weighing on some of the families we serve. This stubborn inflation in dry grocery and consumables is one of the key factors creating uncertainty for us in the back half of the year because of the cumulative impact on discretionary spending in other categories, specifically general merchandise…As we look ahead to Q2 and the rest of the year, we're focused on getting our merchandise costs and retails down to fight inflation for our customers and members, which will help us with mix...[Working] with those suppliers that are on the prepared foods and consumable categories to get costs down more as fast as we possibly can would help them drive unit volume, would help us with mix and free up cash for customers to use for discretionary goods. And that's what we're focused on, have been focused on, and it's just taking longer in those categories than we want.”

Walmart shared that for Q1, private label penetration (their own brands) increased 110 bps in the grocery sales mix, which implies around +5.5% in units. In contrast, national brands would be down slightly. As the table below shows, Walmart-grocery comps have consistently been 2X that of the conventional grocers on a 1-year basis and 1.5X on a two-year basis. We would expect those ratios to hold in the 2H. (Remember that Walmart is the largest grocer in the U.S. with over 25% market share.)


On its 1Q 2023 update call, Target’s CEO Brian Cornell noted, “As it did throughout last year, pressure from inflation and rising interest rates affected the mix of retail spending in Q1, with a further softening in discretionary categories in the March and April time frame.” CFO Michael Fiddelke added, “More specifically, we began the quarter with positive comp growth in the month of February and then saw the trends soften into low single-digit declines by the end of April and so far into May.” Notable for Target’s earnings release was management's expectation for a softer Q2 2023 with comp sales forecasted to decline in the low-single-digit range and an extremely wide earnings per share (EPS) range outlook of $1.30-1.70 per share (which implies a range of ~$230M in net profits). Our data indicates that Target outperformed Walmart with respect to in-store visits (below); however, Walmart also produced strong e-commerce growth which is not captured in our foot traffic data. Walmart has also noted stronger trends by more affluent households, and so while it may be losing some trips by less affluent households, it is mixing up in affluence and spend per visit.

Of particular note in Target’s release was the explicit communication that shrink would be $500M worse this year, on top of last year’s $600M figure, or $1.1B combined (above the unknown base level in 2021). On the call, Cornell said, “Theft and organized retail crime are increasingly urgent issues, impacting the team and our guests and other retailers. The problem affects all of us, limiting product availability, creating a less convenient shopping experience and putting our team and guests in harm's way. The unfortunate fact is violent incidents are increasing at our stores and across the entire retail industry. And when products are stolen, simply put, they're no longer available for our guests who depend on them, and left unchecked, theft and organized retail crime degrade the communities we call home…As a result, we are engaged in a variety of mitigation efforts, which began with significant resource investments to protect our team and our guests. In addition, we're installing pictures to protect merchandise and adjusting our assortment in affected stores. Beyond safety concerns, worsening shrink rates are putting significant pressure on our financial results…That's why we're actively collaborating with legislators, law enforcement and retail industry partners to advocate for public policy solutions to combat organized retail crime. As we communicate with those partners, we emphasize that we're focused on keeping our stores open in the markets where problems are occurring. Our stores create jobs, serve local shoppers and act as critical hubs in communities across the country and we'll continue to do everything in our power to keep our doors open.” (Readers will recall some recent very high-profile retailer store closures and market exit announcements.)

As it relates to business execution, readers will recall that Target's primary objective last quarter was getting their inventories clean. The retailer was able to keep it that way, as inventory turns were a very healthy 5.8X (quite a positive development given the softer consumer spending). Cornell noted, “Our cautious posture has not reduced our commitment to offering fresh, on-trend merchandise throughout the year. We know that newness is a critical element of what our guests expect when they shop with us. And even if they manage their household budgets and make disciplined buying choices, our guests continue to respond when we offer the right combination of newness, trend right fashion and affordability.”

As expected, sales of beauty, food & beverage, and household essentials drove sales, with discretionary categories down. Target Chief Merchant Chistina Hennington said, “With a balance of strong opening price points, timely and relevant promotions, as well as a mix of competitively priced national brands and high-quality and affordable owned brand offerings, we have an opportunity to boldly demonstrate the power of Target's value proposition to our guests…Given that consumers are cautious when buying discretionary items, we are being more declarative than ever about affordable joy and leaning into value messaging across all our media channels, in-store signing, merchandise displays, and through our digital platforms.” Given the shift in the company’s consumer messaging and the sales mix towards everyday essentials, that is diving up both store traffic and conversion rate. Store comparable transactions were up an estimated +1.5% and store comp sales were up +0.7%, whereas “digitally-originated comp sales” were down -3.4%. Of note, its curbside business grew high single-digits for the period; if those sales were recorded as store sales, store comparable transactions would have been +2.1% and comparable sales would have increased +1.3%.

There doesn’t appear to be any notable regional disparities in visits per As such, we would characterize the overall consumer malaise as nationwide and “general in nature.” Given that it’s a general malaise, we would refer readers to our preview of the retail environment for spring/ summer and our Holiday 2023 & Beyond Outlook. What we are most concerned about as a potential second shoe to drop is the restart of student loan repayments in the late summer/early fall, which we have penciled-in at $4K per borrower per year for those between 25-35 years of age.

TJX and Ross Stores: Great Values on Desired Brands is in Fashion for All Consumers

TJX Companies

TJX’s Marmaxx division (T.J. Maxx and Marshalls) posted a strong comparable-store sales of +5%, with apparel up high-single-digits but homegoods down. HomeGoods posted comparable store sales declines of -7%. Marmaxx's trailing-twelve-month (TTM) sales per square foot increased $5 quarter-over-quarter to $439. HomeGoods declined $7 to $369, but that is well above 2019’s $348.

The buying environment remains strong for the company as is reflected in the very strong Marmaxx profit margin of 14.0% (vs. 13.7% in 2019). The press release quotes CEO Ernie Herrman as saying “Every day, our global organization is focused on bringing customers around the world excellent values on great fashions and great brands and an exciting, treasure-hunt shopping experience. We are pleased that the second quarter is off to a good start, and we are seeing phenomenal off-price buying opportunities in the marketplace. We are set up extremely well to continue shipping fresh and compelling merchandise to our stores and online throughout the spring and summer. Going forward, I am confident that we have significant opportunities to grow sales, drive customer traffic, capture market share, and improve the profitability of our company.” What struck us in the results, aside from the strong margins, was the strong performance of new Marmaxx stores over the past year and the improved conversion rate year-over-year, which also demonstrates that Marmaxx’s merchandise and values are connecting with shoppers when they visit its stores (which has been the case for the past five quarters, indicating that they are building on last year’s improvement). As it relates to HomeGoods, it is clear that they are working hard to clean up Bed Bath & Beyond’s market share. CFO John Klinger noted that they expect the HomeGoods comp to improve in Q2 2023 and beyond and stated, “We continue to see a terrific opportunity to capture additional share of the U.S. home market. In the first quarter, we opened our 900th HomeGoods store and continue to see excellent opportunities to grow both our HomeGoods and Homesense banners.” As shown below, traffic is better for HomeGoods in early May.

While management wouldn’t comment that they were getting a trade-down customer, they did share that they believe that their breadth of "good/better/best" brands and price points was allowing them to bring in a wide breadth of households and that for the quarter Marmaxx locations in more affluent markets had stronger comps than those in less affluent markets. Management also shared that their average ticket was moderating because that was where the consumer was going, and they expect more moderation in the near term (which must be what they are seeing in May). To our ears, the moderation is happening because of average unit retail (AUR) versus fewer units per transaction (UPT). The consumer is more discerning and careful with their purchases (i.e., seeking better value and wanting to touch and feel) are two of our bigger themes for 2023. More broadly in retail, we are seeing trade down, which can also be seen in results for Home Depot and Target.

Ross Stores

Ross Stores reported a +1% increase in comparable-store sales, with the comparable average ticket coming in flat year-over-year. This put its trailing-twelve-month sales per sq foot at $342 (compared to Marmaxx at $439). The company's Q1 2023 press release quotes Ross Stores CEO Barbara Rentler as saying, “Despite continued inflationary pressures impacting our low-to-moderate income customers, first quarter sales were relatively in line with our expectation." Similar to TJX Companies, the availability of goods from vendors is abundant allowing them to put very attractive, newly fresh, treasure hunt merchandise in front of their shoppers. We see evidence of that in its improved inventory turns and the much improved conversion rate. Last year, Ross' conversion rate took a big hit in Q1. This year, Ross recaptured that and so while traffic was down, comp transactions were +1% (i.e., when consumers visited their store, they liked what they saw and bought which is the mark of strong execution by Ross’ merchants). Moreover, it’s even more impressive considering the pressures facing consumers that Rentler highlighted as well as the very soft general merchandise results for Walmart and Target.

On its Q1 2023 update, Rentler noted that its "focus [as a merchant group is]…delivering the best branded bargains that we possibly can… [The Ross merchants and buyers] know that they need to get--they need to have their values be sharper. So they're competitive shopping, seeing what's going on in stores and then they're in the market and vendors are giving them the lay of the land…”

Athletic Footwear: Air Pocket Ahead

Over the past year and some, we have written about how the escalating competition between premium athletic brands was shifting the industry’s focus from strictly direct-to-consumer (DTC) to re-embracing wholesale partners, be it Dick’s Sporting Goods, Nordstrom, Hibbett Sports, Scheels Sporting Goods, Foot Locker, and the local performance running specialists. Other notable developments over the year include another year of large market share gains by HOKA and On Running--which was in the wholesale channel--and the Adidas and Yeezy split (and the resulting change in leadership and brand/business strategy). All of this has convoluted into the industry still having a glut of inventory--one year after that glut was widely recognized and unprecedented amounts of clearance activity ensued--which has resulted in a large pull-forward of demand over the trailing-twelve-month period creating an air pocket for the next twelve months. And so “air pocket against an elevated base” is why Foot Locker reported a large earnings miss and guide down this week (sending its stock price down 25%). Below, we will talk about a few of the brands that have reported recently in order to frame up a following discussion of Foot Locker.


On reported +78% revenue growth year-over-year during Q1 2023 (including 92% growth in the U.S.) and raised its full-year revenue growth outlook to +42% growth based upon strong than expected wholesale orders for 2H 2023. Using rough averages, the guidance equates to $1B of wholesale equivalent revenue in the U.S. and selling 14.3M pairs of shoes, up from 10.6M last year. (On’s business is principally wholesale. They do sell apparel, but it’s only 4% of the sales mix.) Co-Founder Caspar Coppetti shared, “We are very satisfied to see that On's…strategy of winning races and converting everyday runners to On is delivering strong results. To illustrate, the Cloudsurfer, Cloud Monster, Cloud Runner, and Cloud Go, four running products that were only launched within the last 12 months are now making up 45% of On sales at the leading U.S. running store.” Co-CEO Martin Hoffmann stated, “On products are now available in almost 9,800 doors [globally]. This includes the now 58 doors that we have at Dick's Sporting Goods, a partnership that we are incredibly happy with and it plays an important part in expanding our reach to new customers… [And] those 58 stores have the highest average sell-through of all wholesale doors.”


Adidas' North American first-quarter revenue fell 20%, with sizable declines in sportswear and Yeezy product. For the year, Adidas continues to expect to report a EUR 700M loss, including EUR 500M in Yeezy product. Pre-pandemic, the business produced profits of around EUR 2.4B. There are no expectations for the business to return to that level in the near- to medium-term.

Unfortunately for Adidas, inventories remain far too high with turns for the quarter of only 2.0X vs. 3.2X when it was in better fitness. CEO Bjorn Gulden stated, “The inventory issues in U.S. are bigger than...normalized [in the near term], and the reason being that the inventory level, we are now channeling most of the excess inventory through our direct-to-consumer (D2C) channel. That means that our factory outlets, for example, which normally should have fresh merchandise also coming directly out of factories is now being only serviced by clearance, which again takes your margin down. And there isn't any way right now to clear excess merchandise through channels that you normally do. The value channel with T.J. Maxx's and Ross Stores' are also full. So that's why our approach is to do this over 3-4 quarters and not try to flush it in one quarter because it won't help because it will come back again." These challenges create an opening in the market that On Running and Lululemon seek to fill, and it allows for an easier path for Nike to get itself back on stride after its own inventory glut.

Under Armour

Like adidas, Under Armour has a new CEO (Stephanie Linnartz, formerly with Marriott), and last week’s Q1 2023 update call was her first in the role. Her assessment of Under Armour was, “We are not pulling in our fair share of market growth. I believe a causal factor here is the inconsistency of how the Under Armour brand shows up across our regions, with the most significant opportunity to improve in the United States…In the U.S., there is no question that athletes love the Under Armour brand. And while our consumer insights tell us that we have tremendous brand awareness there is also a high level of latent brand equity. Latent because consumers are aware and engaged, yet conversion is more dormant than it should be. I attribute this state to inconsistent execution across our product, marketing, and retail efforts. From aligning products to be premium at every price point, to disciplined channel segmentation to more consistent product marketing. There is a significant opportunity to activate more simply across the dimensions that matter and drive improved brand affinity…From both the global and U.S. perspectives, we're assessing how our products, athletes, and marketing strategies are or are not breaking through to reach our target consumers. From brand activations to a roster that includes Stephen Curry, Justin Jefferson, Jordan Spieth, and others, we have a massive investment in place. Yet it's clear to me that we are not capitalizing on our assets to our best advantage or return. Driving brand heat, of course, is not a one-size-fits-all approach. We cannot simply apply the same storytelling product and distribution strategies across the regions and expect to generate the same levels of brand heat globally, yet unifiers can be crucial to driving consistency.

We exited undifferentiated wholesale doors reduced our off-price exposure by more than two-thirds and reorganized our people, systems, and processes…In North America, we run a very productive and profitable outlet business with our Factory House concepts, but these represent about 90% of our physical DTC locations in the region. That leaves only 18 full-priced brand health stores in our home market, not many places where we can showcase our brand in the best presentation possible. So compared to the roughly 75%/25% split that many of our competitors have working for them, this is an opportunity for premium growth. As such, we plan to focus our full-price stores and productivity and consumer experience, driven by smaller, easier to navigate store formats, better storytelling to appeal to young athletes, exceptional customer service and always being in stock. By the end of this calendar year, our full-price concepts will also be revamped to showcase sportstyle products with a more robust curation. Longer term, we want to build on this progress by expanding the number of full-priced health stores as we perfect this. Nearer term, based on learnings from our Flatiron New York City pop-up as part of the SlipSpeed launch, we are working to identify additional ways to support critical moments like sporting events, competitions and festivals.

In our wholesale business, we have solid relationships with best-in-class sports specialty, department stores and pure-play e-commerce companies. Still here, too, the critical mass in our U.S. business is oriented towards good-level products. We have an opportunity to build out the better and best part of our segmentation. In addition, we continue to evolve our strategic partnerships towards areas where we believe we are underpenetrated, including the mall and run and golf specialty shops as examples. To wrap up, this becomes our third strategic priority, which is to drive U.S. sales. Improving our U.S. business is critical to growing our global business. As a most profitable region, growing faster here means more future dollars to invest in product, marketing…”

In terms of near-term outlook, Under Armour expects revenue to be roughly flat for the trailing-twelve-month period from March 2023-March 2024, with the U.S. down due to weaker wholesale orders.


Allbirds reported another difficult quarter, including a revenue decrease of -13% and an EBITDA loss of -$22M. Revenue declined primarily due to a contraction in average price, driven by high promotional activity. Gross margin was down to 40% versus 52% in the prior year. Q2 revenue is expected to be down at a mid-teens rate to last year. The business continues to consume cash, -$24M for the quarter, but at a slower rate. The balance sheet has $144M in cash and equivalents. One new U.S. location was added during the period, and on their Q1 2023 update, management said they would pause openings and expand wholesale distribution strategies with Dick’s, Nordstrom, REI, and Scheels. On e-commerce, Co-Founder Joseph Zwillinger stated, “We drive a higher full-price sell-through inside of our brick-and-mortar stores. That is really the best expression for the brand. We have the highest NPS in our 4 walls, and we do drive higher full-price sell-through…in terms of how we're going about improving productivity in the stores, it's really we're here to sell shoes in the stores and focusing on what we can control in the 4-wall is probably the most important.” Unfortunately for the brand and business, inventory is still bloated (turns of only 1.15X versus industry averages of 5-7X) which inhibits its ability to put fresh product onto the shelves, demonstrate newness, create scarcity value, and build brand heat/excitement.

Foot Locker

Foot Locker reported a comparable-store sales decline of -9.1% for its April-end quarter, with CEO Mary Dillon saying in the quarterly press release, “Coming off…our Investor Day [on March 20th] … our sales have since softened meaningfully given the tough macroeconomic backdrop, causing us to reduce our guidance for the year as we take more aggressive markdowns to both drive demand and manage inventory."  On its update call, Dillon said, “We've seen the consumer retrench as they continue to face pressure from rapid inflation which we see squeezing their ability to spend on discretionary items, including athletic footwear. In addition to overall discretionary spend seeing some pressure, those spending dollars also appear to be directed more towards services and away from products as consumers are forced to be more choiceful on how to spend their money.” (All of these characterizations are consistent with our description of the retail market since last November).

For the quarter, the WSS banner comp was -3.3%, Foot Locker was -5.5%, but Champs was down -25%. The 25% increase in inventories is very misaligned with the sales trend and turns deteriorated to 3.2X, far below the normalized 4.5X. Gross margin declined by 400 bps due to higher markdowns, increased theft-related shrink, and occupancy expense deleverage. Guidance for the year was meaningfully lowered with the mid-point of comps down -8.25% (from -4.5%) and earnings to $2.13 per share (from $3.50 per share). The biggest driver of the lowered earnings guidance was more aggressive markdowns and higher shrink. And so, it’s these convoluting dynamics along with the pandemic and 2022 clearance pull-forwards that will make 2023 (and likely 1H 2024) a challenging period for athletic footwear retailers to get inventory well positioned which is the precursor for rebuilding profitability.

Dillon also noted, “When we gave guidance, we are seeing steep comp declines given a number of factors: our reset with Nike, our transition of the Champs banner, our shutdown of the East Bay banner...As part of our guidance, we had forecasted a pickup in growth in April as we move past the tax refund drag and benefited from a more favorable launch calendar during the month. And while trends did improve, they did not improve nearly to the extent we expected, and that weakness has continued into May.” Chief Commercial Officer Frank Bracken said, “Lifestyle running was the category with the most disappointing sell-through for the quarter as many of the styles were carryover from holiday 2022, and were promoted throughout the Q4 season, the consumer was resistant to a return to full price selling in Q1 2023. That, combined with lower tax refunds and a challenging financial picture for our lower-income customers created a significant headwind for our marquee lifestyle running franchises, which are normally full-priced from $120 to $200.” In discussing Champs, Bracken said, “Comps were down 25% as we preferred Foot Locker for key launches and constrained supply of Nike Inc. products during the reset. The higher penetration of apparel, which underperformed as a category was also a drag on the banner.”

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RJ Hottovy

Head of Analytical Research,

R.J. Hottovy, CFA has covered the restaurant, retail, and e-commerce sectors for 20 years as an equity analyst and strategist for Morningstar, William Blair & Co., and Deutsche Bank. R.J. also brings a wealth of experience with early-stage investments as a committee member for the IrishAngels / Vitalize venture capital group. Over the past three years, he advised over 50 food service companies on more than $200 million in early-stage capital raises and M&A transactions.

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