Modern Retail Rundown: CVS to open micro-stores, beauty sales slow down & apparel brands warn of a weak Q1

0:04Hey, everyone. Welcome back to the Modern Retail Rundown. I am senior reporter Gabby Barco and I'm back this week with executive editor Anna Hansel. Hey, Anna, how are you? I am good. You've been back for a while now, but welcome back from Expo West. How was it? Thank you. Yeah, it was great. It was big and cool. But yeah, I am excited to be back after Julia filled in last week, which I appreciated. But yeah, we have so much to cover this week. I feel like, I mean, I guess it's a break earnings week, which tends to bring a lot of news usually, but we have a few different stories lined up. First off, CVS is opening these mini pharmacies that are, I guess, part of its bigger plan to scale back this massive footprint that it had built over the years.

0:57And then next, we're going to talk about the beauty retail sales that are, I guess, showing signs of slowing down. We're seeing a couple of smaller brands shutting down and then some others that are filing for bankruptcy. And then also this week, Alta, their earnings showed that they've had a little bit of softness in growth. So all of that, to me, points to a bigger slowdown maybe than we were expecting. And yeah, speaking of slow growth, last story of the day is going to be about American Eagle, but really more so the general apparel category that is also struggling right now. So a lot of retailers are basically warning that they're going to have a pretty weak 2025.

1:42Yeah, it's been kind of a slow start to the year. I mean, I feel like January and February, it's kind of just getting a sense of like how the year is going to shape up. And I feel like now we've gotten a few more indicators about how the year is looking the past few weeks. And is that great for some sectors? Yeah, I mean, I think on top of everything, all the uncertainty in the air, it's probably not a good sign. But, you know, maybe we can get into the first story that kind of starts to unpack all of this. But yeah, this week, the Wall Street Journal reported that CBS is going to open 12 new locations in the US that are these pretty much like mini pharmacy only stores, no retail, but they are going to be like less than half of the size of the typical CVS store, which is about 5000 square feet.

2:35First thing I thought is like, this is very European, you know, like just having the pharmacy as a pharmacy and not like a candy aisle. But I guess we'll talk about why that is. It is important to note that the stores will still stock health-related products such as over-the-counter cough and pain medications or first aid care. So, you know, there still is an opportunity to, like, pick up other things while you're on the way there for your prescription. It's not terribly surprising to me. I think that pharmacy chains have known for a long time that their future is adding on more healthcare-related services and really doubling down on the health aspect of it versus trying to sell more greeting cards or snacks.

3:28But they haven't quite figured out the right way to do it. I just pulling on my Rolodex of retail knowledge, I feel like we've seen so many things over the years of, of course, like maybe trying to add clinics and stores or finding other ways to double down on the health services. And nothing has really stuck there. But I think that gravitating towards the smaller format stores, it kind of kills two birds with one stone. It also helps reduced footprint and real estate expenses. But yeah, it makes sense. And this stat that you found was interesting. In 2024, more than 80 % of CVS's store sales were generated by its pharmacy department.

4:13So when you look at that, it makes sense. Yeah, that's sort of what I was getting at, which is like less emphasis on the sort of food, beverage, greeting cards, aisles, and more so on like the overall health space, because for a while, you know, a lot of these big drugstore chains had been expanding so much into all these other categories in the name of, you know, becoming sort of this one stop shop. But in the last few years, we're seeing them, you know, really lose that retail customer to other, you know, big box stores and dollar stores, discounters, for many reasons, one of them being that a lot of analysts pointed out, if you've shopped drugstore in a major city, you know that the prices are usually marked up.

4:57So right now, the price conscious customer is probably going to pick up their refill and then maybe go to a nearby grocery store. Yeah. Thinking of my own behavior, when I've gone to my local pharmacy, which is in a major metro area to pick up my prescriptions, usually I'll be like, oh, I should get these other things that are on my shopping list while I'm here. But oftentimes they're locked up and there's no store associate to unlock it. Or what I've also encountered is that it's out of stock. I don't know if I want to buy dish soap, it's like there's one option and it's the Walgreens private label and that's not really what I want anyways.

5:43So it just seems like it's a lot to manage, but it's like if the pharmacy chains can't do the retail and the non-healthcare side of the business as well, then like it begs the question, they might as well not do it at all. Yeah. And I want to note that during the sort of pandemic vaccination phase, a lot of these chains, you know, like Walgreens, Rite Aid, even CVS benefited from the foot traffic. So they were actually getting pretty decent, you know, add-ons people coming in for their vaccines and then buying some stuff on the way out. But that has slowed down for a lot of the reasons we just mentioned.

6:22And so this kind of now we're seeing this downsize or shifting to more of like the core pharmaceutical offerings, I guess. But yeah, it seems like this is a big test this year for CVS because it is part of a bigger general like store closures that have been happening. Right. Yeah. The last thing I'll mention is the stat you pulled, which said that CVS plans to close 270 locations in 2025 already after 800 net closures in the past three years. It's pretty crazy. It seems like, yeah, they're in a position where they're having to close a lot of stores anyway. So might as well experiment with newer, smaller formats.

7:05Yeah. And one thing that the Wall Street Journal noted in their reporting is that these new locations are going to be in these areas where shoppers are already buying kind of what you did, the household items from like Walmart or nearby dollar store. So I think they're very much honing in on those geolocations because they know that is what's happening. But maybe, you know, they don't have a pharmacy in their Walmart location. So this is sort of the idea of these miniature stores. But yeah, it'll be interesting to see. I mean, I think some of them are opening by the end of the year. So we'll see how they perform pretty soon.

7:41Okay, well, now let's move on to beauty sales, which surprisingly are also showing some signs of slowing down. We're seeing that beauty and skincare categories, I guess, aren't immune to a lot of these economic shifts that we're seeing. For a while, they were pretty resilient. There was some slowdown here and there over the last few years. But overall, this was a pretty bright spot for retail. So yeah, Ana, what are your thoughts now? You know, we're seeing retailers like Ulta kind of warning of a weaker than expected year. And then we have some brands closing down as well. It's interesting. There's kind of been this line that the beauty category is recession proof, which to me, that's a very loaded statement because I don't know, it depends how long this recession lasts, how deep it is.

8:37The entire beauty category is going to be impacted in different ways depending on the subcategory. But I will say that I do think for the past couple of years at least, beauty has been a bright spot. It seems like that is a category that has continued to see strong sales. We've continued to see more brand launches and innovation in that area. But there are some signs that that might be changing. So there's just been a few interesting pieces of news from the beauty world this week. So first of all, this past week, Retail Dive reported that skincare startup FutureWise is shutting down. And this was a brand that was launched by the founders of Starface, which are these popular acne care stickers.

9:30FutureWise, I believe, was focused on the category of slugging, which don't ask me to define that. I'm not a beauty person. But the company had entered Target in 2023 and appeared to be growing. I think that's just a sign of when things are going really well in a category. You see a lot of brand launches. You see these startups who maybe find success with one brand and they're like, ooh, we should launch sub-brands and get into other categories. And so I think a pullback like this is interesting. But other companies in the space are also struggling. So beauty tech startup Katerra, they sell a lot of appliances, more like a body sculpting device, But they filed for a prepackaged Chapter 11 bankruptcy on March 5th to reduce its debt by$400 million.

10:28So different category there, more on the appliances side, but again, another kind of worrying data point for beauty. And then Apostrophe, which was a skincare treatment telehealth brand operated by Hims and Hers. Hims and Hers acquired them in 2021 for about$130 million. That was also sunset this month. So Hims and Hers is deciding to just focus on other parts of their offering. They've placed a big focus on compounded GLP-1 treatments recently. Its website just says apostrophe is being discontinued and all current subscriptions will be canceled as of March 7th. So this is on the kind of smaller brand side, and we'll get into the bigger retailers in a second.

11:19But it's just whenever I'm looking at a sector, I try to see the through lines between different data points. And I think here it's like, okay, some brands or companies are cutting back on investments in certain areas or cutting back on subcategories. So that is worrying for the industry as a whole. Yeah, and I think now is a good time maybe to talk about how these brands' performances are impacting the retailers that they usually sell at. So Ulta Beauty being what I consider pretty big bellwether for beauty. This week issued a pretty weak guidance for 2025. It says, you know, it's navigating these consumer uncertainty in air quotes.

12:08and it's also expecting comparable sales to be flat or grow about 1 % in 2025. Analysts had anticipated 1.2%. So again, it's still growing, but considering that this was a quote unquote recession proof segment of the industry, people are, I guess, ringing the alarm. But yeah, I mean, Alta, I think maybe this is a good time to talk about the fact that it is also struggling generally because I think one thing about beauty and skincare is that because it's such a hot and the margins on skincare are crazy I think there's something like 90 percent I was told that's why you're basically allowed to return anything at Sephora or Alta oh that's funny they still make yeah so much money from friends that work in the space but yeah I mean I think uh there there's just more competition like even somebody like Amazon and Walmart are bringing on these brands So Ulta obviously is feeling that heat.

13:03Yeah, I think to your point, it's a very competitive category. And when you are a mass retailer like Ulta, sometimes, you know, the missteps can just be like maybe investing too much in the wrong subcategory or not investing enough in other subcategories. Yeah, so they appointed a new CEO in January, and they kind of outlined a comeback plan on their earnings call just this past week. And so, yeah, we'll see what happens. It always takes a while to right the ship. But there is evidence to suggest that growth in the skincare category in particular may be slowing after being a bright spot in retail for a few years.

13:52So a recent report from Surkana showed that across prestige beauty categories, skincare was the softest growing category. But dollar sales were still up 2%. And then in mass market, there was similar growth in skincare, but a modest growth. growth and yeah if you just look at the category as a whole even um elf beauty which has had so many i forget it's like 20 something consecutive quarters of growth they had a slow start to 2025 and they're now also now all these brands of course have to deal with china tariffs and other tariffs on top of everything um so i think it'll be really interesting to see how this plays out And we'll get into this in our next segment, too.

14:43But just consumer behavior is very weird right now. And there's a lot of questions, I think, in the industry about, you know, what pullbacks are temporary and which aren't. And I think that that is that's something that all categories are trying to figure out right now. But especially within beauty, I think the challenge for all of these brands and retailers is like, what does consumer demand and consumer behavior look like in an overall soft demand environment? We'll see what happens. Yeah, well, okay. So speaking of that, now we can maybe talk about American Eagle and just the general apparel category, which, you know, unlike beauty, which is still pretty much growing consistently, it is not doing so well.

15:35So yeah, let's talk about the numbers. How is first American Eagle and then we'll get into the general guidance for this year. So American Eagle actually had a strong fourth quarter, and they also had a strong 2024. So they reported fourth quarter results this week, and they said comp sales were up 3%. It's Aerie brand, which continues to perform well, no surprise there, reported record revenue with comp sales growth of 6%. But American Eagle did warn that it's off to a slow start during the first quarter. So specifically, the company is forecasting a mid-single-digit revenue decline during the first quarter and a low single-digit decline for the entire year.

16:23We'll see, again, consumer behavior can change very quickly. I think that's just based on what they're seeing now during the first quarter, but things can change. Okay, so I guess maybe we can talk about what is the big issue other than just generally people are not buying as much clothes right now. Footwear too, but apparel is obviously what we're talking about here. On the earnings call, the president, Jan Foyle, said that American Eagle had some out of stocks in some categories that people were looking for. And bare looks such as shorts and tees have been soft because cold weather items like sweaters are overperforming.

17:08I mean, these are, you know, weather patterns and people just shopping for the current. Yeah. So this is so interesting. And you have written, Gabby, about how sometimes retailers like to blame the weather for poor performance. And it actually does seem to be a factor. I mean, multiple retailers are pointing to this. Yeah. So the big quote from the earnings release that kind of pointed to what American Eagle is experiencing right now. This quote, this quote attributed to the company's CEO, Jay Schottenstein, said that entering 2025, the first quarter is off to a slower start than expected, reflecting less robust demand and colder weather.

17:52So to your point, again, American Eagle said that its cold weather items were doing well and that some of its clothing designed for warmer weather hadn't been doing so well during this first quarter, which makes sense. I mean, I do feel like though that's like if you're an apparel retailer, I imagine this is something you deal with all the time. Yeah. And American Eagle's president also said that warmer markets had been doing better. So it really does appear that weather might be a big issue. Something else I noticed in the earnings call is they said that no surprise, active wear and like leggings continue to do well.

18:36And this is just a thought that bubbled up into my head. But I feel like this is going to be the year of all these brands touting their$25 Lululemon dupe leggings or something. It just seems like every apparel retailer that somewhat plays in the activewear category is trying to find their hero leggings or hero activewear basics to drive a lot of sales. Yeah, I think this is a good time to talk about maybe some of what the other retailers are doing here. I think Target is another good example. We did talk about this recently with their whole sort of revamping all of their offerings. But they also said that during the fourth quarter that it was seeing some softness in February.

19:24The CEO, Brian Cornell, said consumers continue to show a willingness to splurge on newness. We saw this play out around Valentine's Day, saw record high sales apparently. And then at the same time, though, they discussed before persistent economic uncertainty did have shoppers taking a cautious approach to spending in the discretionary categories. I guess, you know, do you count apparel as discretionary? It's all kind of blurring together. Well, the trick for a lot of these retailers, I feel like Target during its fourth quarter earnings call and investor presentation, they talked a lot about trying to recapture the Target magic.

20:11And I think for them, the key is so like what the CEO said is consumers continue to be willing to splurge on newness. So it's like newness is such a broad term. It's like, sure, you can create newness, but it also has to be newness that consumers want. So I think the trick for a payroll retailer is kind of finding what are consumers excited about right now? Like what are the like new silhouettes, patterns, et cetera, that they are willing to splurge on. But also finding these kind of reliable hero products or subcategories that are just like staples that continue to perform well. So I remember, you know, Target has said that it's active wear brand all in motion again continues to do well.

21:05Also, it's in-house kids apparel line. Kat and Jack continues to do well. So it feels like they're really kind of doubling down, investing a lot in kind of those like hero private label brands, but finding other ways to like drive newness, which is the ongoing battle. But just looking at other comments from Apparel Earnings, Gap, which has in the midst of its own turnaround, they said that they expect net sales in Q1 to be flat to slightly up year over year. Its CFO also called out the weather saying the cold start to February was somewhat unfavorable, but didn't seem too worried about it. And also the big one that surprised me was that Zara said it was seeing a slowdown in demand at the start of the year, which is one that has typically performed well.

22:02So I feel like the big question on analysts' minds and on my mind is, is this really a temporary blip due to the weather or is this a sign that consumer sentiment is really starting to tank? Yeah, I mean, just the general environment is also maybe pointing to the latter. But yeah, it's, you know, you've got weather, you've got newness being an issue. But I do think there's also maybe something to be said about as much as people do want to buy new clothes with the seasons changing. Like, I wonder if maybe something like resale is also impacting this thrifting. I think people, whenever you are trying to cut back, the first thing I think of is like, do I really need another top or another dress?

22:47Maybe I could find it cheaper somewhere else. So at least that's what we're hearing from some of the resell players. No, and I do think another issue is consumers putting off purchases for longer. I think in just like this weird economic time and amid this weird weather pattern. And yeah, the issue is like there are some consumers who are like, do I really need to buy a new like sundress for spring? Do I really need to buy a new swimsuit? And so that's the challenge that all these brands and retailers have to address. Yeah. Well, the weather is going to be changing soon. So we'll see. We'll see what happens.

23:29Maybe that will turn things around. Here we go. Well, they do say spring and summer do bring a lot of people Dubai for vacations and whatnot. So maybe that will help, but we'll find out in a few months. But yeah, I think that is it from us for today. Thank you so much for listening. Follow us, please, on social media. We're at Modern Retail. We cover all of this stuff very extensively on the site. So come back on Saturdays for more rundown. And on Thursday, you can listen to the Modern Retail interview show, which is co-hosted by Ana. Ana, do you have a preview for next week? Yeah. So next week, I am going to be talking with the CEO of PopSockets, Jai Yu Lin.

24:14So you are probably familiar with PopSockets. If you don't have one, you've seen one on the back of someone's phone. And we talked a lot about how they're really trying to position the company now as more of a lifestyle brand. So getting more into things like cases and wallets and kind of doing different collaborations that really highlight their products as a way to like express your identity or kind of tap into your fashion sense. So it was a fun conversation. cool looking forward to it and we will see you back here next time thank you for listening