On Wednesday, 2 retail stocks led the US markets higher as these stocks paid no heed to the current fears of slowing consumer confidence and global slowdown. Global investors saw possibility that US economy will hold up better than many people fear. Stock market benchmarks were up by over 1.5% at midday as optimism gripped investors as to what tech companies can say in their upcoming earnings reports. In contrast, retail stocks impacted the sentiments of US stock market lately. Yet on Wednesday, the retail sector was a leading participant in the rally, with Abercrombie & Fitch and Williams-Sonoma exhibiting sharp gains.
These 2 retail stocks which led the US markets higher gave the investors a much-needed confidence in the retail space.
1. Abercrombie & Fitch Company
Abercrombie & Fitch Co is specialty retailer engaged in selling casual clothing, personal-care products, and accessories to be used in men, women, and children. The company sells direct to consumer via its stores and websites, including the Abercrombie & Fitch, Abercrombie kids, and Hollister brands. The company released its results for the 2Q ended July 29, 2023.
Net sales and operating margin of the company in 2Q exceeded its expectations as global growth picked up. The company continues to see strong customer receptivity of its brands and product, supported by 26% net sales growth in Abercrombie brands. Operating leverage due to sales growth and gross profit rate performance made contribution to an operating margin of 9.6%, exhibiting a significant expansion from 2Q22. On the operational front, the company appears to be strategically managing inventory, leveraging capabilities to support demand, and supporting efficiency throughout its business.
In 2Q, the company saw net sales of $935 million, exhibiting a rise of 16% in comparison to the last year on reported basis and up 16% on constant currency basis. Gross profit rate of the company in 2Q came in at 62.5%, exhibiting a rise of ~460 basis points against last year. The year-over-year improvement was supported by benefit of 400 basis points as a result of year-over-year AUR growth and 340 basis points from lower freight costs offset by 180 basis points rise in cotton and raw material costs and adverse impact from foreign currency of 60 basis points.
Operating income of the company in 2Q came in at $90 million on reported basis in comparison to operating loss of $2 million and $0 million last year, on reported and adjusted non-GAAP basis, respectively. Its net income per diluted share was $1.10 on reported basis in comparison to net loss per diluted share last year of $0.33 and $0.30 on a reported and adjusted non-GAAP basis, respectively.
During 2Q23, to support ongoing brand growth and leverage knowledge and experience of different regional teams, Abercrombie & Fitch Co was able to reorganize structure and, as a result, now manages business on geographic basis, having 3 reportable segments: Americas, Europe, the Middle East and Africa (EMEA) and Asia-Pacific (APAC). As of 29 July 2023, the company had cash and equivalents of $617 million against cash and equivalents of $518 million and $370 million as of January 28, 2023 and July 30, 2022, respectively.
For fiscal 2023, the company now projects net sales growth of ~10% from $3.7 billion in 2022. This exhibits an improvement to the prior outlook of 2% to 4%. Current outlook provided by the company assumes that Abercrombie brands should continue to outperform Hollister brands. Apart from this, fiscal 2023 consists 53rd week for reporting purposes. This 53rd week should add ~$45 million to total net sales in 4Q and FY23.
For 3Q, the company expects operating margin of between 8% – 10% in comparison to an adjusted operating margin of 2.4% in 3Q22. It anticipates year-over-year improvement to stem from higher gross profit rate on lower freight costs and increased AURs and modest operating expense leverage on increased sales.
2. Williams-Sonoma, Inc.
With wide retail and direct-to-consumer presence, the company has been categorised as the leader in $300 billion domestic home category. It focuses on expanding its exposure in B2B, marketplace, and franchise areas. It announced operating results for 2Q ended July 30, 2023. The company significantly exceeded profitability estimates, with operating margin coming at 14.6% and earnings per share of $3.12, well above its pre-pandemic results.
The company saw strong results in an increasingly promotional environment and softening industry metrics. It focused on regular price selling, enabling in improved customer service and controlling costs.
While the company expects annual revenues to come in between down 5% to down 10% in FY23, it projects operating margin of 15% to 16%. Reduction in the revenue outlook should be offset by the company’s raised operating margin guidance. In long term, the company expects mid-to-high single-digit annual net revenue growth and operating margin of more than 15%.
Asset Management One Co. Ltd. purchased a fresh stake in shares of Williams-Sonoma during 1Q worth $203,000. Westpac Banking Corp increased its stake in the company by 1.4% in the 4Q. Westpac Banking Corp now owns 23,867 shares of the company’s stock worth $2,743,000 post buying an additional 338 shares in the previous quarter.
Analysts at Robert W. Baird reduced their price objective on the company’s shares from $130.00 to $125.00 in a research note dated May 24th. Another firm, Telsey Advisory Group, upped their price target on the company’s shares from $135.00 to $146.00, giving the stock an “Outperform” rating in a report dated 18th August.
Bottom-line
While there are some challenges in the retail space, these 2 retail stocks supported the sector’s momentum and led the US markets higher. These 2 retail stocks, which supported the broader market, turned investors’ heads because there are other retail companies which have given subdued outlook. Macy’s has issued a warning about their weak 2H demand and Foot Locker has reduced their outlook for the full year. Foot Locker has paused quarterly dividend because the company’s sales dropped in its fiscal 2Q as consumers continued to be more cautious regarding their purchases.
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