Retailers Look to Put a Bad Week Behind Them

THE CHEAT SHEET

More Big Retailers Report Earnings This Week

• Gap, Kohl’s, L Brands and Nordstrom are among the retailers reporting financial results this week
• Last week, Macy’s, Tapestry and J.C. Penney saw shares plunge after reporting weaker-than-expected sales
• Consumer spending remains strong despite recession signals

Is retail in trouble, or is it merely that certain retailers are in trouble? That was the question last week, as shares of Macy’s and Tapestry plunged to post-recession lows, and dragged many of their competitors down with them. Investors are clearly primed for a retail downturn, though whether they believe the trigger is likely to be tariffs, a recession, Amazon or some combination of the three changes from day to day. The apocalypse isn’t here just yet. US retail spending was quite robust in July, so last week’s weak results could be a matter of consumers preferring Walmart over Macy’s or Tory Burch over Kate Spade. The next round of earnings should provide some clarity; Nordstrom has had time to course-correct after reporting merchandising issues earlier in the year, while Kohl’s spent the quarter expanding its Amazon returns partnership. If they also disappoint, watch out below. 

The Bottom Line: Gap Inc. will come under particularly close scrutiny for how its Old Navy brand performs. The struggling retailer plans to spin off its star performer, and needs to show a sales decline last quarter was an aberration.

Is Victoria’s Secret Owner L Brands Ready for Change? 

• Victoria’s Secret and Bath & Body Works owner L Brands reports second-quarter results on Aug. 22
• The lingerie brand’s sales have fallen for two straight years, to $7.4 billion in 2018
• L Brands founder Leslie Wexner’s ties to disgraced financier Jeffrey Epstein have come under scrutiny

Victoria’s Secret has all the problems detailed above, and then some. Unlike Macy’s or Tapestry, the company has done little to adapt its brands to the new retail reality. That largely comes down to the fact that Wexner and a handful of veteran advisors maintain total control over the Victoria’s Secret brand and so far have not been persuaded to adjust course, despite years of sliding sales. Change may be coming; two independent directors were appointed earlier this year after a fight with an activist investor, and veteran marketing chief Ed Razek has stepped down. But though Wexner must now hear outsiders’ advice, he doesn’t have to listen. This week, executives have an opportunity to lay out a path forward, from clearing up the fate of the annual fashion show to plans for Bath & Body Works, the successful soap and fragrance chain that some believe should be spun off. 

The Bottom Line: Looming over everything is Epstein, whose suicide in prison likely will not end inquiries into his alleged crimes or his relationship with Wexner. 

The End of Ownership Hits a Tipping Point

• Banana Republic and Bloomingdale’s are among the retailers launching rental services in the coming weeks
• Macy’s and J.C. Penney will sell used clothes in some stores via partnerships with ThredUp
• ThredUp estimates the clothing resale market hit $5 billion in sales last year

In the US at least, it’s almost become easier to name the retailers that don’t rent clothes than to list the ones that do. A market that Rent the Runway once had almost to itself now includes Ann Taylor, Express, Banana Republic and Vince, among others, plus Bloomingdale’s, one of the first department stores to enter the ring. As more retailers embrace the end of ownership, it’s questionable whether there’s a market for all of them. The average American spends about $150 per month on clothes, or roughly the cost of two of these subscriptions. Most focus on women, who spend more on apparel (Scotch & Soda’s upcoming men’s rental service is an exception, and Banana Republic says it plans to add men’s rentals at a later date). Resale is perhaps more promising; sales on platforms like ThredUp and The RealReal are booming. The thrill of discovering a gently used find could draw new customers to department stores, though they have to work out how to offer used clothes without cannibalising sales of new merchandise.

The Bottom Line: Rental and resale may or may not save retail. But the fact that struggling retailers are willing to experiment with the core concepts of their business is a promising sign.

COMMENT OF THE WEEK

“This is exactly why the fashion industry is in the awful state that it is. The small independent designers that need the money desperately are being ignored while people with an Instagram following are the ones getting all the money … how long before the industry finally collapses because it keeps rotating the same tired designers or giving all their money to ‘influencers’?” @heeeeeyeroyuy, commenting on “The Billionaire Who Backed Michael Kors Is Investing in Ariel Charnas“

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