Q4 2021 Retail Preview: Supply Chain Problems Continue

U.S. retailers have endured multiple supply chain disruptions during the pandemic – and the costs are huge. In its last earning call, Gap GPS said it incurred approximately $450 million in airfreight costs to meet customer demand. The retailer had to deliver by air approximately 35% of its holiday product due to delays from its Vietnam manufacturing closures in Q3 and the West Coast port delays (Source: Gap Q3 2021 Earnings Call).

EBITDA margins

Although these costs are deemed necessary to move inventory, they inflict a huge hit on a retailer’s profitability. Gap reported a 7.6% EBITDA margin in Q3 2021. However, this is expected to drop to 1.8% in Q4 2021, according to Refinitiv I/B/E/S estimates. This would mark its lowest EBITDA margin since the first quarter of 2020 (Exhibit 1).

Exhibit 1: Gap EBITDA Margin

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Source: I/B/E/S data from Refinitiv

Negative Predicted Surprise

Moreover, Gap currently has an EBITDA mean forecast of $82.95 million for Q4 2021. However, there’s a five-star rated analyst with a very accurate rating that published a Bold Estimate, which is different (in this case lower) than the consensus estimate. The analyst expects Gap to report EBITDA of $48.20 million, well below the mean.

The StarMine SmartEstimate is a weighted average of analyst estimates, with more weight given to more recent estimates and more accurate analysts. Our studies have shown that when the SmartEstimate differs from the consensus (I/B/E/S mean) by more than 2%, the company is likely to post subsequent earnings surprises directionally correct 70% of the time. This percentage difference is referred to as Predicted Surprise (PS%).

Supply picture

Similarly, Refinitiv data shows that supply issues continue to hit the companies below and are also expected to see a decline in EBITDA in the current quarter (Exhibit 2).

Exhibit 2: Decline in EBITDA Margins

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Source: I/B/E/S data from Refinitiv

These companies have provided a bearish outlook due to supply issues, the ongoing pandemic and other macroeconomic constraints. Looking at Refinitiv Workspace, we highlight specific commentary from earnings call transcripts below:

  • “As we discussed in September, the global supply chain remains highly disrupted with core backlog and shifting production schedules, leading to longer delivery times and higher transportation costs.” (Source: Q3 2021 American Eagle Earnings Call)
  • “As expected over the holidays, we saw higher costs driven by labor supply shortages and inflationary pressures, and these issues persisted into the first quarter due to Omicron.” (Source: Q4 2021 Amazon Earnings Call)

 The pandemic has affected just about all retailers’ supply chains. Still, some have navigated that better than others. The companies below have been able to maintain healthy EBITDA margins, and in some cases grow profitability throughout the pandemic. Some are on track to post stronger EBITDA margins this quarter. This doesn’t mean they are immune to supply chain issues, but that they have managed better (Exhibit 3).

Exhibit 3: Healthy EBITDA Margins

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Source: I/B/E/S data from Refinitiv

Guidance

For Q4, 55 retailers reported earnings to date, of which 45 mentioned the supply issues.

When the pandemic of 2020 brought the retail world to a grinding halt, most stopped providing guidance, mainly due to the uncertainty of the pandemic’s course and the timing of store reopenings, which was out of their control. It is clear that the amount of guidance provided is still less than usual, compared to pre-pandemic levels (Exhibit 4).

In addition to the 16 Q12022 negative preannouncements and four positive for EPS, retailers posted 21 negative and fourteen positive revenue forecasts (Exhibit 4). The bulk of the Q1 2022 negative guidance (43.8%) comes from the household durables sector.

Exhibit 4: Q4 Earnings and Revenue Guidance

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Source: I/B/E/S data from Refinitiv

Q4 2021 earnings

The Refinitiv U.S. Retail and Restaurant Q4 earnings index is expected to rise by 18.9%. When looking at the earnings growth rates for Q4 for the 202 retailers tracked by Refinitiv, the Hotels, Restaurant & Leisure sector has the highest earnings growth rates at 173.1%.

It’s important to note that due to the pandemic, this sector remained mostly closed and reported weak results last year. As a result, this sector is facing easy comparisons from a year ago. The second strongest sector is Household Durables with a 27.0% earnings growth rate (Exhibit 5). On the flip side, the Internet & Catalog Retail is facing difficult comparisons and has the weakest anticipated Q4 2021 estimate of -52.3%.

Exhibit 5: The Refinitiv Retail Earnings Growth Rate – Q4 2021

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Source: I/B/E/S data from Refinitiv

Within the Hotels, Restaurant & Leisure sector, Marriott International, Bloomin’ Brands, and Booking Holdings have the strongest earnings growth rates of 4322%, 2593%, and 2475%, respectively. Thirty-nine companies in this sector are on track to post double digit or higher earnings growth rates in Q4. In addition to easy year-over-year comparisons, this sector had started to see improvement from consumers who are feeling more comfortable staying at hotels and eating out.

On the flip side, the Internet & Catalog Retail group’s earnings growth rate is being affected by negative earnings growth expectations. Four of the six companies in this group have negative earnings growth rates, mostly due to difficult year-over-year comparisons. During the pandemic, consumers gravitated online to retailers such as Amazon. Due to strong sales last year, Amazon has a -58.8% earnings growth rate this year, followed by Shutterstock’s 48% estimated earnings growth rate.

Twenty seven percent of companies in our Retail/Restaurant Index have reported Q4 2021 EPS. Of the 55 companies in the index that have reported earnings to date, 76% have reported earnings above analyst expectations, 4% matched, and 20% reported earnings below analyst expectations (Exhibit 6). The Q4 2021 blended earnings growth estimate is 18.9%.

The Q4 2021 blended revenue growth estimate is 12.8%. Of the 55 companies in the index that have reported earnings to date, 75% have reported revenue above analyst expectations, and 25% reported revenue below analyst expectations.

Exhibit 6: Refinitiv Proprietary Research Restaurant & Retail Dashboard – Q4 2021

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Source: Refinitiv I/B/E/S

Retail sales

Same Store Sales (SSS) are also referred to as Comparable Store Sales. However, there is no comparable year to 2020. Never before has there been a government mandate for retailers and companies to close their physical locations. As a result, several retailers didn’t report SSS and many companies withdrew guidance for most of 2020.

The Refinitiv Same Store Sales (SSS) index is expected to see an 8.4% gain in Q4 2021 (Exhibit 7). A 3.0% SSS gain reflects healthy consumer spending. The 8.4% SSS estimate is robust considering the difficult comparison the index is facing from last year when Q4 2020 SSS came in at 9.9%.

It’s very important to note that the 2021 results are not an apples-to-apples comparison vs. previous years as many retailers were closed due to shelter in place regulations. As a result, a number of retailers did not report SSS in 2020, while those that reported saw a huge spike in SSS, boosted by key essential items.

 Exhibit 7: Refinitiv Same Store Sales Index: 2017 – Present

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Source: I/B/E/S data from Refinitiv

Due to store closures and weak Q4 2020 performance, many retailers are facing easy comparisons from a year ago. As a result, most retailers are expected to report double-digit comps, which are not a true indication of organic business growth. Mall stores, including apparel and department stores, had been struggling with weak traffic before the coronavirus pandemic and continue to be the most vulnerable. Due to easy comparisons from a year ago, comps appear stronger and the bulk of them have double-digit Q4 2021 SSS estimates (Exhibit 8).

Express has the easiest year-over-year SSS comparison and is on track to report a 21.4% SSS, above last year’s easy comparison of -27.0% SSS result. Likewise, Chico’s is on track to report a 31% SSS, above last year’s -24.9% SSS.

Exhibit 8: Retailers facing easy SSS comparisons: Q4 2020 Actual vs. Q4 2021 Estimate

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Source: Refinitiv I/B/E/S

On the other hand, there are several retailers that did well during the 2020 pandemic and posted strong SSS. Moreover, despite facing these difficult SSS comparisons, they continue to post robust SSS estimates for Q4 2021.

One standout is Crocs. The shoemaker posted an impressive 63.8% SSS gain in Q4 2020 and is on track to report a 45.1% SSS increase in Q4 2021. Consumers continue to gravitate towards comfort during the pandemic.

Consumers also continue to invest in improving the stay-at-home experience. Four out of the ten most difficult comparisons are in the Home category (Exhibit 9). Within this group, Lovesac is facing the most difficult comparison — and still is expected to post double digit Q4 SSS gains with a 24.5% Q4 SSS estimate. Similarly, Williams Sonoma has a 12.7% SSS estimate on top of last year’s robust 25.7% SSS result.

Meanwhile, Home Depot and Lowe’s continue to face very difficult comparisons from a year ago and are on track to post a 4.7% and 2.7% SSS, respectively. In normal times, a 2.7% SSS is a sign of modest business growth. However, in this case due to their very difficult SSS comparisons, it is actually a sign that business is holding up well.

Meanwhile, the discounters continue to maintain their business volume despite facing difficult comparisons.

Exhibit 9: Retailers facing difficult SSS comparisons: Q4 2020 Actual vs. Q4 2021 Estimate 

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Source: I/B/E/S data from Refinitiv

Restaurant Same Store Sales

The Refinitiv Restaurant Same Store Sales (SSS) index took a big plunge into negative territory in 2020, hitting a record low in Q2 2020. Since then, it’s improved somewhat. Given its easy year-over-year comparison, it is expected to see a 15.1% growth in Q4 2021, considerably above last year’s -5.5% SSS result (Exhibit 10).

It’s important to note that the 2020 results are not an apples-to-apples comparison vs. previous years as many restaurants were closed due to shelter in place regulations. As a result, a number of restaurants did not report SSS in 2020.

Exhibit 10: Refinitiv Restaurant Same Store Sales Index: 2019 – Present

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Source: I/B/E/S data from Refinitiv

Due to social distancing practices, Dave & Buster’s Entertainment hurt the most among all the restaurants last year and posted a -70% SSS (Exhibit 11). Due to the easy comparison, the restaurant is on track to post a triple digit SSS growth for Q4 2021. Likewise, due to easy comparisons from a year ago, several restaurants already reported positive SSS, which don’t necessary represent organic business growth; Ruth Hospitality, Denny’s, and IHop beat their comp estimates with 286.6%, 120.1%, 117%, respectively.

Exhibit 11: Restaurants facing easy SSS comparisons: Q4 2020 Actuals vs. Q4 2021 Estimates

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Source: I/B/E/S data from Refinitiv

Still, Wingstop faced the most difficult comparison has a healthy 6.5% comp estimate. Strong digital sales from a year ago also helped sales at Wingstop, Papa John’s International and Domino’s Pizza (Exhibit 12). Carry-out and delivery make up a big portion of these companies’ revenue and continue to stay in high demand during the pandemic. Quick service dining continues to perform well.

Exhibit 12: Restaurants Facing Difficult Same Store Sales Estimates/Actuals: Q4 2021

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Source: I/B/E/S data from Refinitiv

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