Kohl’s Jumps on Outlook Boost in Sign of Consumer Resilience

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1:49Mary Ross Gilbert:Listen on demand wherever you get your podcasts or watch us live on YouTube. Want to talk retail now because we've got more numbers out today from some big players, including Kohl's and Abercrombie. Let's break it all down now with Mary Ross Gilbert, Bloomberg Intelligence's senior equity analyst. She covers retail. So she's the right person to talk to right now. So Mary, Kohl's trying to reverse 14 straight quarters of declining revenue. How'd they do? Yeah, so Alexis, Kohl's, okay, look, they reported comp sales down still. And as you pointed out, 14 consecutive quarters of declines, or another way to look at it, over the past three years, they're cycling three years of declines.

2:35Mary Ross Gilbert:So, but what really we're looking at in the news that came out with Kohl's, One is that on the call, the company said July sales were flat. That was really encouraging. And when you look at the third quarter and the guidance for the third quarter, again, still looking for declines for the balance of the year, down 4 % to 5 % on a comp sales basis. But for the third quarter, they're going to cycle a 9.3 % decline last year. So that means the comparisons are easier and they're off to a good start. So it's encouraging. And what we're finding is that they're bringing back the core private brands that are really resonating because of the open price points and their core consumer, which is that sort of low to low middle income consumer.

3:25Mary Ross Gilbert:They're really pressed by inflation still. And so they are really looking for the value. And as they brought that back in and they brought back fashion jewelry and, you know, they're working on refining fine jewelry but that's all resonating now with the customer and so that's where they're seeing some strength and so we're seeing encouraging signs there but they're not out of the woods yet right because you know again three years of comp sales declines and you know they're still their sales are still declining so we'll see if they actually reach stabilization by the end of the year they're saying no we're not but we're They're thinking they're providing conservative guidance so that they can beat.

4:07And then with regard to the stock action, part of that reflects short covering.

4:12Mary Ross Gilbert:If you look at the shares borrowed, it's about a third of the outstanding shares are borrowed. So it's going to take over five days to cover, you know, shorts. And so that's part of the action in there. Hey, Mary, what are Kohl's and some of the other companies saying about, I don't know their strategies for dealing with tariffs in terms of, A, passing along to consumers, B, taking it maybe near their margin, or C, I don't know, kind of pushing back on some of the suppliers. Is there a consensus building about how some of these retailers are dealing with it? Yeah, Paul, that's a really good question because tariffs is absolutely top of mind.

4:51Mary Ross Gilbert:And with Kohl's, Kohl's really sources most of their product from other brands and companies. They do have their own private brand business. It's probably somewhere around a third of the business. You know, they're getting it back in order because, of course, they went too low last year. And what they're finding is they're sharing with their vendors. This is what we're finding across the board. And they're finding an ability to raise prices on select items. So with Kohl's, we did see a margin improvement in the quarter. and so because the private brands do deliver a higher margin on an overall basis versus the third-party brands, they're getting that benefit and that's helping to offset a bit of the tariffs.

5:35Mary Ross Gilbert:And again, they're less impacted versus some of the specialty apparel brands like Abercrombie and PVH and those companies reporting, which they did disclose what kind of exposure they have. But we are seeing across the board that there is sharing It's usually about 50 % where the suppliers will say, we'll absorb 50 % of the cost, and then the other 50 % is taken by that brand. Then they will do strategic price increases on certain items that they feel will be less noticeable to the consumer. Mary, before we get to Abercrombie, one more question here on Kohl's. Bloomberg News is reporting that Kohl's is having trouble paying its vendors on time.

6:16Mary Ross Gilbert:What do we know about that? Alexis, I'm really glad you brought that up because that was never brought up on the call. Nothing came up in that conversation. When we saw that article break yesterday, we said, what? I mean, that's kind of like a warning sign. And it basically says, look, they're just trying to manage their working capital needs because we're in a period right now where they're taking in all of the inventory for the holiday season. That's coming in right now. And so that's a big cash use. And that's kind of where we are in the third quarter is where they're going to have to raise their revolver borrowings to fund those needs.

6:56Mary Ross Gilbert:And so there was a bit of a concern, but nobody on the earnings call brought that up with the company. But we're watching that closely. Like I said, Kohl's is not out of the woods yet. All right. Abercrombie, what's the story there? So on Abercrombie, generally they beat, but, okay, and it was all led by Hollister, which we could see in the transaction data, and it was something that we saw in the first quarter. And they're cycling some big comparable sales increases in the prior year period for their namesake Abercrombie brand. But the decline in comp sales, you know, was down about 11%, was way worse than what analysts were looking for.

7:39Mary Ross Gilbert:They were looking for a decline of something like down 7%. The reason for that is they had some carryover inventory at lower average price points that they were selling through in the quarter, and that's what really took the comp sales down. But they were very optimistic about third quarter start with their denim program, with their NFL collaboration. And so they feel like that's going to really benefit all of the initiatives that they have to benefit the Abercrombie brand. going forward. So they feel like, no, this is just a little bit of a hiccup, nothing to be alarmed about. And I think what we're seeing generally when we think about all these earnings reports so far is that the consumer is resilient.

8:22Mary Ross Gilbert:We have the lower income being a little more strained and being very careful and choosing what they're going to buy. But when they see the value, they're spending. Stay with us. More from Bloomberg Intelligence coming up after this. When your options are limited, so are your opportunities. At SIBO, the global exchange that pioneered options trading, we offer more ways to move with the market. From VIX and SPX options to global market data solutions, SIBO helps investors diversify, manage risk, and stay ahead of whatever the market does next. SIBO. Life is better with options. Your investments could be too.

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10:55I don't shop there very often, do you?

10:57Mary Ross Gilbert:I used to more. I like their kitchen stuff, I have to say. I own quite a bit. Okay. All right. The stock, they reported some numbers. Stock's off about 1 % here today. William Sonoma's sales surprises. Costs look manageable. That's the reaction from Bloomberg Intelligence. Let's talk to that analyst, Lindsay Dutch, Consumer Hardline's Senior Analyst for Bloomberg Intelligence. Lindsay, talk to us about William Sonoma. What did you learn in their earnings release, and how's their business doing? Hi, Paul. Thanks for having me. Williams-Sonoma had another really good quarter. We're seeing continued momentum in sales, which is a positive for them, especially given higher interest rates and new home sales being soft.

11:37And more importantly, they held the guidance for operating margin flat, even though they're facing tremendous cost headwinds from tariffs.

11:47Mary Ross Gilbert:You know, I'm looking at the stock right now. It's not doing much of anything, down about half a percent. Why not a better reaction from Wall Street? You know, I am also puzzled by that. I think that there's not much more that you can ask for from a company like this. You know, they are working on getting to some sales growth goals. They're showing progress there. They are leveraging their scale, negotiating with suppliers. They're basically mitigating all of the costs from the tariffs that they're experiencing this year, which was basically a doubling in the tariff rate than they were expecting from the first quarter.

12:24So it's a significant headwind. They're basically planning to offset all of it with all of their mitigation efforts, and they're going to continue to see some profit growth this year. Long-term goals are intact. So how are they mitigating it? So they're not going to pass anything along to consumers. How are they mitigating it? So they are doing select price increases. They have multiple levers that they are pulling. So they are negotiating with their suppliers, sort of managing the cost sort of on the supply side. They're shifting sourcing, you know, with a new threat of an additional tariff just on furniture imports.

13:00They're looking to increase U.S.-made inventory heading into next year. They are also increasing the prices. And the fact that demand is showing momentum, you know, that's a positive sign that they can execute those price increases. successfully and continue to get a good margin on those products.

13:21Mary Ross Gilbert:So William Sonoma is a company that also owns the Pottery Barn brand, West Elm. Curious if there were strengths sort of across the board, across its brands? Yes. So this was the second consecutive quarter that we saw same-store sales growth across all brands. Pottery Barn and West Elm are the two big ones that we've been watching over the past, say, four to six quarters. and that's because there really has been a bit of a challenge when it comes to demand for furniture. Coming into this year, we saw some positive momentum in that business. Williams-Sonoma has continued to outperform, so we saw growth in those two brands again in this second quarter, while the industry was still down for the quarter.

14:04So they are seeing good demand with those two big brands, and they're saying that a lot of that is coming from the new products that they're launching. See, I was on the impression prior to this furniture tariff talk that pretty much all our furniture came from like North Carolina, like Thomasville, North Carolina. That's kind of where I thought it all came from. That's not the case. Talk to us about furniture supply chains. Where does this stuff come from and what is the tariff situation there on this stuff? Right. So the best disclosure I have is from the end of last year. I do think some of the numbers have moved a little bit.

14:36But at the end of fiscal 2024, William Sonoma got about 18 percent of their cost of goods sold made in the U.S. You know, they're a little bit higher than a peer like RH, which was closer to 10 percent at the end of last year. Part of that is because William Sonoma has a lot more seasonal items and decor items rather than just plain furniture. I do think that number, you know, probably was is increasing throughout this year. And again, I think there will be an accelerated effort to get that number higher for 2026 with a threat of a new tariff. When we think about the other countries, you know, exposure to China has drastically come down since 2018, 2019.

15:17That's more closer to the 20 percent range. But there's also exposure to Vietnam, which is a big one, and India, where the tariff just went up to 50 percent. So there's still more diversification to be done on the supply chain. And I think those efforts will continue heading into the next year.

15:34Mary Ross Gilbert:And, Lindsay, in about 30 seconds, connect these dots. How much are William Sonoma's fortunes tied to the housing market? So that's a great question. They are they will see stronger demand with a pickup in housing, but they've been lucky to see that higher income consumer still looking to update, you know, within their kitchens in existing homes. And that is fueling demand over the past year or so. Stay with us. More from Bloomberg Intelligence coming up after this.

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18:18Mary Ross Gilbert:or watch us live on YouTube. Cracker Barrel cannot get enough of this story, Paul, apparently. So I want to bring in Michael Halen. He's Bloomberg Intelligence Senior, restaurant and food service analyst. So has Cracker Barrel not been canceled now, Michael, because they're bringing back the old logo? Well, I checked this morning and some right-wing commentators are not happy about some of their past endorsements of the Nashville LG TBQ parade and some things like that. They have some issue with one of the board members whose experience is owning a DEI company. What's that? Just enjoy the biscuits and gravy.

19:03That's where it stops and starts with me. It's awesome. Yeah. Oh, man. It's crazy. I mean, Cracker Barrel now has been on both sides of the culture war. Right. So, you know, in the first Trump presidency, the left had taken issue with some people that were dining at Cracker Barrel. Right. And now you have the right up in arms. It's kind of sad to see, to be honest with you. I think the right was on the right side of history the first time. And I think, you know, now that they're in power, they're, you know, you know, the ones engaging in cancel culture. So it's kind of disappointing to see. I think they've been very unfair towards Julie Messina, who's, in our opinion, has done a great job so far.

19:46You know, one of the things more substantive than the logo is kind of the interiors of the restaurants and the menu. There's some big changes there with these new formats. Are they still moving ahead with that, Mike? Yeah, and we're seeing results. They've been beating and the streets have been forced to raise their estimates throughout the year, right? So sales are inflecting higher. We expect traffic to inflect higher in this next fiscal year over the next 12 months or so. So, yeah, things are going well. I mean, they've gotten a lot of shade online about the remodels, obviously about this logo rebrand.

20:24But these people complaining clearly weren't going to the stores because same store sales and traffic have been in the gutter for years. So, you know, to us, I think a lot of the complaining is done by people that really don't frequent Tracker Barrel. They're using it as an excuse to kind of push their ideologies. And it's, you know, it is what it is. But these remodels and these refreshes are working. They're bringing in, you know, dinner business has improved for five straight quarters, right? And they're trying to bring in younger consumers who really basically left the brand for dead. You know, it wasn't a member of their consideration set, right?

21:08And so we think the management team is making the right moves, refreshing their stores, giving them a fresh coat of paint, you know, updating the furniture inside, right? And, you know, we expect these to continue to help boost results.

21:24Mary Ross Gilbert:Yeah. Have they had to raise prices at all? Because I know that's a sensitive area for their customer base, really for everybody. Right. But I mean, how have they been able to deal with tariffs and not having to raise prices unless they are? Yeah. So they have a little bit more exposure to tariffs because of their retail stores in the front. About 20 percent of those items in that retail store are sourced from China. They have been working hard to to work, you know, to source products from other countries or within the United States to try to ease that impact. Right. But that's a that's a smaller part of their sales.

22:04The restaurant sales are a much bigger part of their average unit volumes in in the restaurants. right um the good thing for cracker barrel is that it's priced so far below its casual dining competitors right average checks at dinner are you know maybe 30 40 cheaper than some of their competitors right and so they've been able to lean into strategic pricing they relate to the game there and this new management team this is one of their many initiatives that they've uh implemented to try to boost top-line growth. And so they're strategically raising prices 5%, but it's at the units that can support it based on demographics in the DMA.

22:50Stay with us. More from Bloomberg Intelligence coming up after this. Bite into a stacked sandwich made with hero bread or a fully loaded bagel, and the only thing you'll think is delicious. You won't think it's up to 19 grams of protein, but it is. You wouldn't believe it has 11 to 32 grams of fiber, but it does. Hero Bread makes loaves, buns, tortillas, bagels, and noodles packed with taste but without all the net carbs. We're talking 0 to 5 grams net carbs per serving. With Hero Bread, there are no compromises, just flavor. There's none of the stiff-baked goods you expect from Better For You brands.