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Omicron Hits Retail Sales Reports, Threatening Sales and Profits

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·7 min read
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The Omicron strain is starting to show in retailers’ sales reports.

Lululemon Athletica Inc. — which falls into the category of still strong, but feeling some pain — was among the companies resetting expectations for the fourth quarter as COVID-19 again upended expectations. (Abercrombie & Fitch Co. also warned of a weaker fourth quarter, but cited lower sales due to pandemic-era problems getting inventory through the supply chain).

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The Omicron variant has pushed COVID-19 case counts levels sky high, resulting in more hospitalizations and a return to some social distancing restrictions. And while some schools districts have temporarily closed and businesses have gone dark or reduced hours due to staffing shortages, retail has clearly suffered.

That’s feeding into broader concerns that the fashion industry was already in for tough comparisons in 2022 as well as more supply chain turmoil and — potentially — a return to a more promotional environment that could hurt margins all around.

For the brands with the most momentum, Omicron seems to be something of another speed bump in a rough stretch.

Calvin McDonald was largely bullish in his update to investors, although the chief executive officer acknowledged the weight of the latest COVID-19 surge.

“We started the holiday season in a strong position, but have since experienced several consequences of the Omicron variant, including increased capacity constraints, more limited staff availability and reduced operating hours in certain locations,” McDonald said.

He also noted, “We are closing out a strong 2021 in the coming weeks and we’re pleased with how Lululemon has delivered over the course of the year.”

For the fourth quarter, Lululemon is now anticipating net revenues will be on the low end of its previous-stated range of $2.12 billion to $2.16 billion. Diluted earnings per share are also expected to be on the low end of the company’s range of $3.24 to $3.31.

Last month the company reduced its expectations for Mirror — the at-home fitness system it purchased for $500 million in 2020 — citing supply chain headwinds and increased competition in the at-home fitness space at the time. Mirror represents about 3 percent of Lululemon’s total annual revenues and is expected to produce sales of $125 million to $130 million for the year, down from previous estimates of $150 million.

After the stock market closed on Monday, Abercrombie said its fourth quarter sales would be up 4 percent to 6 percent compared with a year ago. But against the comparable period in 2019, sales should be flat to down 2 percent, where the company had projected an increase of 3 percent to 5 percent.

But Abercrombie said its gross profit rate would be on par with 2019 levels and in line with its outlook, reflecting “reduced depth and breadth of promotions and markdowns, offset by approximately $75 million of freight cost pressure.”

That was apparently enough compensation for investors, who sent shares of the company up 6.7 percent to $34.50 in afterhours trading.

Fran Horowitz, Abercrombie’s CEO, said consumer response to the company’s winter and holiday collections was strong and that promotions were held to plan but that shipments dropped off amid the global supply chain tangle.

“After a strong start to the quarter in inventory receipts and product sell-through, we experienced unexpected inventory receipt slides in key categories due to extended port and transportation delays,” Horowitz said. “As a result we did not have enough inventory to keep pace with customer demand, resulting in lost sales during the peak holiday selling period.”

With a rising stock price, Abercrombie either timed its update right or simply fared better than others.

Shares of Lululemon and most other fashion companies were dragged into the broader market sell-off on Monday, which saw investors fretting over when the Federal Reserve would start to boost interest rates to fight inflation; Omicron; U.S.-Russian tensions over the Ukraine, and more.

Among those posting the sharpest declines for the day on Wall Street were RealReal Inc., down 7.9 percent to $10.92; AKA Brands Holding Corp., 7 percent to $7.89; Victoria’s Secret & Co., 6.5 percent to $53.12; Warby Parker Inc., 6 percent to $37.33; Capri Holdings, 5.5 percent to $58.42, and Estée Lauder Cos. Inc., 5.4 percent to $335.89.

Lululemon’s stock fell by as much as 8.8 percent on Monday before recovering and closing down 1.9 percent to $348.43. It wasn’t the only retail stock getting hit by an Omicron warning. Shares of Destination XL Group Inc. fell as much as 4.6 percent before closing down 0.5 percent to $5.44.

But Torrid Holdings Inc. took a hit and didn’t recover, closing down 23.4 percent to $8.20.

Liz Muñoz, Torrid’s CEO, said: “We had a strong start to our fourth quarter, however, the spread of the Omicron variant negatively impacted performance largely due to labor challenges at both our distribution center and a portion of our stores. While we are not a business heavily dependent on holiday sales, our Torrid cash event in January saw a negative impact from these factors. As a result, we are revising our net sales and adjusted EBITDA to below our initial guidance.”

Torrid now expects fourth-quarter sales of $300 million to $305 million, down from the $325 million to $335 million previously forecast.

Harvey Kanter, president and CEO of Destination XL, said; “With the resurgence of COVID-19 infections from the Omicron variant, we are experiencing a softening of sales which we attribute to growing public concern which we have reflected in our updated guidance. Supply chain disruptions still exist, however, they continue to slowly improve and we are continually monitoring and pivoting to ensure we have a better flow of inventory to meet our sales expectations.”

But he sounded positive notes about the company’s recent structural changes, which saw Destination XL posting strong holiday sales online and in stores with “very few promotions.”

Fashion companies of all sorts have used the disruption of the pandemic to make big changes in their businesses — and now those changes will be put to the test.

Carlos Alberini, CEO of Guess Inc., was at the ICR conference talking about his company’s transformation.

“With the crisis, we were able to capitalize on the opportunity to transform the business model further,” Alberini said. “We launched a global line, and this happened this past year with very significant success. This is giving us a lot of benefits in terms of how the brand is represented. But also, it enabled us to reduce development costs. It enabled us to really portray a consistent market presence in every part of the globe, and we think that that is very significant.”

Guess also closed about 170 stores, renegotiated leases on 400 of its remaining 1,052 doors and streamlined its infrastructure.

But if the fashion industry is now populated by smaller operations that are more digital and accustomed to being more agile than ever before, the living still isn’t easy.

Jay Sole, a stock analyst at UBS, recently offered a bearish take on the softlines industry, downgrading Kohl’s Corp. to “sell” and Abercrombie & Fitch & Co. and Canada Goose Holdings Inc. to “neutral.”

“We envision a series of events unfolding during calendar year 2022 which catalyze downward EPS revisions and keep sentiment negative,” Sole said in a year-ahead outlook.

“We don’t believe the market fully appreciates these three factors: How inflation will negatively impact demand and costs; how much lapping fiscal stimulus will pressure sales, and the likelihood merchandise margins contract as the industry returns to normal promotional levels.”

UBS forecast sales at U.S. apparel and accessories stores would fall 2 percent this year.

Sole has “buy” ratings on shares of Nike Inc. On Holding, Deckers, Skechers, and Bath & Body Works and “sell” ratings on Nordstrom Inc. Dillard’s Inc. and Macy’s Inc.

Clearly, the pandemic is not done with retail — even if retail and everyone else are done with the pandemic.

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