This week’s IRS data showed similar trends vs last week, with similar refund sizes compared to last year while volumes remain slightly lower. Although the tax refund data has yet to turn positive, it no longer has the look of a crushing headwind for the specialty retail sector.  

If not tax refunds, then what really drove the wave of disappointing earnings this week?

Tax Refund Fog Lifts, Specialty Retail Secular Pressures Remain

Last week we posed the question if tax refunds were really the primary issue facing retailers, or if it was distracting from other challenges. Leveraging Amenity Analytics' NLP platform, we identified several secular pressures that will remain after the distraction of tax refund timing passes:

Pricing pressure

Dollar General (3/14/19):

• "Gross profit, as a percentage of sales, was 31.2% in the fourth quarter, a decrease of 91 basis points. This decrease was partially attributable to higher markdowns."

Express (3/13/19):

• "The majority of the contraction that we’re expecting in Q1 is one driven by the reduction in sales and the negative guidance that we’re providing of -9%to -11%, along with the fact that we’re going to be increasing the promotions in Q1 to clear through inventory to get us to the right place for Q2."

Freight costs driving lower e-Commerce margins

Dick's Sporting Good (3/12/19):

• "The decline in gross margin was driven by higher shipping, fulfillment and freight costs as a result of our strong eCommerce growth and by occupancy deleverage."

FTD Companies (3/14/19):

• "Results for our Personal Creations business were very strong for the first 3 quarters of 2018, but fell short of our expectations in the fourth quarter, largely as a result of marketing cost pressures and higher freight costs."

Ulta Beauty (3/14/19):

• "So again, pressure on the gross margin line but on the EBIT line, stores and e-commerce is a much closer horse race overall."

Product agility

Vera Bradley (3/13/19):

• "The days of every store having the same assortment is just not resonating with the customer like it used to."

Tailored Brands (3/13/19):

• "In a world of slow or declining foot traffic, a strong e-commerce business will be an essential driver of growth. Digitally-native players have demonstrated that this is true even in the suiting category. Our relatively low e-comm penetration, is unfortunately, evidence of a historical act of strategic emphasis and investment in e-comm at a time when the customer increasingly expects to be inspired and be able to transact seamlessly across all channels."

Stein Mart (3/13/19):

• "So as we begin 2019, we’re excited about our new initiatives, which are focused on sales growth. And although early first quarter sales have been a bit challenging, these initiatives give us the opportunity to improve our annual results over last year."
• "In assessing our product categories, it was apparent we were missing 1 major business, children’s."

Wage inflation

Genesco (3/14/19):

• "...we still have upward pressure on wages."

Europe Macro

Genesco (3/14/19):

• "Across the Atlantic, our footwear results were significantly more challenged. With the holiday season playing out against the continued backdrop of weak consumer demand for apparel and footwear in the U.K. and even greater uncertainty around Brexit, Schuh delivered a disappointing high single-digit comp decline."

Consistent with IRS Data, Most See Tax Refund Picture Clearing

Zumiez (3/14/19):

• "February was a little bit of a choppy month. It definitely started better and then finished better. We had a little bit of a slowdown in the middle. So I think we did experience some challenges with the weather. Specifically, some variability around the country and on the West Coast and I think that did impact the quarter. Gotten strong eras we move through. I think there’s probably also some timing related to the tax refund in there and how those dollars are coming across that impacted the quarter. So a slower start to February. Our first week of March was better and kind of got us to where we are in the comp guidance today."

Genesco (3/14/19):

• "The new year started slowly in February, with a delay in income tax refunds due to the government shutdown. While our comps for Journeys in particular were affected by these delays, comps have been very quickly catching up as refunds are catching up."

Walmart - Bank of America Conference (3/12/19):

• "Tax refunds, you’re reading the same things I do. Early in the process, your reading of that was lower. It feels like we’ve caught up some in that process. I think there will be a little bit of a difference between middle income and lower income, how they see those tax refunds go based on child credits and tax brackets and other things like that."

Tailored Brands (3/13/19):

• "And there’s no doubt the current trends are influenced in part by some macro factors, whether that be the delay and – or size of tax refunds or weather in certain parts of the country."

Ascena Retail Group (3/14/19):

• "I think it’s all of those things (weather, tax refunds), and probably more. The late Easter, I think, does have an impact as well. And until we get to warmer weather and Easter, we’re not really going to be able to tell if there is an across-the-board slowdown in consumer apparel spending. So right now, we’re just going to wait and see."

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This communication does not represent investment advice. Transcript text provided by S&P Global Market Intelligence.

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