Earnings   //   November 22, 2021

Retailers fend off slowing e-commerce growth and inventory challenges during third quarter earnings

Nearly two years after the start of the coronavirus pandemic, retailers are still getting accustomed to operating in uncharted territory.

That was evident during a series of third-quarter earnings calls last week from some of the biggest retail chains — Walmart, Target, Home Depot, Lowe’s, Kohl’s and Macy’s all reported earnings.

A few common themes emerged from these companies’ talking points as executives tried to spin their financial performances in the best possible light. For starters, inventory challenges are top of mind for nearly everyone in the industry. Those concerns range from ensuring that stores have enough inventory in stock in time for the holidays, or grappling with when it’s time to raise prices as inflation looms large. Second, as it gets more difficult for some of the biggest retailers to match the e-commerce growth they saw last year, these companies are increasingly trying to eke out whatever growth they can by investing in new categories and services.

Below are some of the highlights from last week’s earnings calls:

Big-box retailers’ e-commerce dominance continues

Target and Walmart were some of the biggest e-commerce winners last year, reporting 155% and 79% year-over-year growth during the third quarter last year respectively.

This year, both chains reported significantly smaller e-commerce growth as more people have returned to shopping in stores — but their online businesses are still getting bigger. Target and Walmart reported 29% and 8% year-0ver-year e-commerce growth respectively during the third quarter.

Jason Goldberg, chief commerce strategy officer at Publicis, said that both Target’s and Walmart’s e-commerce growth this quarter outpaced the industry average of 6.8%, according to U.S. Department of Commerce data. “That is a very good sign for both companies,” he said.

Target executives attributed the company’s e-commerce growth to more of its shoppers using its growing array of fulfillment services — same-day pickup, drive-up pickup and Shipt delivery. Meanwhile, a big area of focus for Walmart has been adding more products to its third-party marketplace — executives said that the company added 21 million new items to its marketplace this quarter — and getting more people to use grocery delivery in order to continue driving e-commerce growth.

Home improvement retailers look to extend the DIY boom

U.S. shoppers have more places to spend their money this year than last– it’s become easier to travel as pandemic restrictions have eased, while many of the restaurants that were closed to indoor dining at this time last year have since fully reopened.

As a result, some of the retailers that saw the biggest gains from people diverting more of their spending to their particular category last year are looking for new ways to keep people engaged. At Home Depot and Lowe’s, both companies benefitted last year from the fact that more people wanted to spend money redecorating their homes while traveling was out of the question. This year, they are trying to get people to stay engaged by investing in new products and services.

Home Depot, for example is focused on growing its business-to-business or Pro business. The company launched a new loyalty program for Pro customers last fall, and has continued to add new perks for members throughout this year, such as increased discounts for spending on popular items like paint.

Lowe’s, meanwhile has spent the past year establishing itself as more of a destination for home goods, not just hardware. The company has started carrying more bedsheets, towels and home accessories, and has also started carrying fitness products in select stores. During its third-quarter earnings call last week, Lowe’s executives announced that the company was partnering with AARP to start carrying products geared toward seniors online and in select stores. As part of the partnership, Lowe’s will start offering installation services for wheelchair ramps, grab bars, and other features people may want to install in their homes as they get older.

As a result, both Lowe’s and Home Depot managed to squeak out single-digit sales growth — Lowe’s comparable sales grew 2.2% year-over-year compared to over 30% growth last year. Home Depot reported comparable sales growth of 6.1%, compared to 24.1% growth last year.

Goldberg noted that the spread of the Delta variant earlier this year led some people to postpone vacations and to once again divert spending back to their homes, which has helped Home Depot and Lowe’s drive more sales growth.

“We dipped back into cocooning mode, and it’s not totally clear that we have come out of that,” said Goldberg.

Department stores are still struggling to figure out their new normal

Department stores were among the retailers that were hit hardest during the pandemic, given their heavy reliance on stores and formal apparel to drive sales. This year, they’ve struggled to figure out their new value proposition in a world where more people have embraced online shopping.

Macy’s reported year-over-year comparable sales growth of 37.6% during its third-quarter earnings — but revenue was up only sightly compared to the same period in 2019. Macy’s reported $5.4 billion in revenue this quarter, compared to $5.2 billion during the same period two years ago.

During last week’s earnings, Macy’s executives announced that the company would be launching a new third-party marketplace in the second half of 2022, which the company believes will help it generate more sales going forward. This quarter, e-commerce accounted for 33% of Macy’s sales.

Macy’s announcement comes as nearly every big-box retailer has launched a marketplace of their own within the past few years — while Walmart first launched a third-party marketplace in 2009, the company started to make it a bigger priority starting in 2018. Since then, the company has nearly tripled the number of items on its third-party marketplace. Albertson’s and Kroger’s also recently announced they were launching a third-party marketplace in partnership with Mirakl, which is also powering Macy’s marketplace.

“Marketplaces in general are a successful concept,” said Goldberg. “When you do it right, it is a great economic model, the vast majority of traditional retailers that launch a marketplace wildly underestimate what it takes to be successful in a marketplace.”

Competitor Kohl’s meanwhile is trying to attract new customers by reinventing itself as a beauty and wellness destination,  largely thanks to a new partnership with Sephora. Kohl’s reported that during the third quarter, more than 25% of customers who came to visit its new Sephora shop-in-shops were new to Kohl’s. These new customers helped Kohl’s grow revenue by 15.6% year-over-year, and report a net income of $243 million, compared to a $12 million loss last year.

Larger retailers are better positioned to overcome inventory challenges

Inflation and inventory shortages were two topics that came up frequently during third-quarter earnings calls. Retail executives went through the list of steps they had taken to mitigate the damage from the rising costs of raw materials and everyday essentials, as well as container ship delays.

Walmart executives, for example, said that the company bought more inventory ahead of time, and has 11.5% more inventory on hand this year compared to the same period last year. CEO Doug McMillion told CNBC that the company was in constant communication with its suppliers about “how can you help us roll back prices and swim upstream and be different than everybody else?’”

Kohl’s CEO Michelle Gass said that the department store chain had lower inventory levels in certain departments like women’s apparel, largely due to the company winding down partnerships with certain brands. But that it had stocked up on inventory in more popular areas, like activewear, noting that it was “one of the categories that’s actually in the best position,” in terms of inventory.

Goldberg noted that while shoppers are likely to experience inventory shortages this holiday season, the impacts are mostly being felt by smaller retailers.

“The very biggest retailers have the most cash to invest in defending themselves from supply chain problems,” said Goldberg.