Bernstein on US Softlines: 'What We Learned From Q3 Earnings'

Bernstein analyst Aneesha Sherman weighs in on U.S. Apparel & Specialty Retail sector following Q3 Earnings.

The analyst noted: "Coming out of the Softlines Q3 earnings cycle, we run through key themes across 17 brands and retailers. A later-than-expected drop in temperatures helped to usher in a strong start to the holiday quarter. We see some recovery in higher-income US consumers, but international growth still outpaces US growth for several brands. Across the board, large brands, retailers, and off-pricers seem less concerned about potential tariffs than originally feared.

Strong start to holiday, helped by colder Nov weather. After a generally strong Back to School season, several brands and retailers companies saw a slowdown in the Fall due to warmer-than-expected weather (TJX, ROST, BURL, M, KSS, GPS, AEO). A cold start to Q4 has driven stronger early Q4 comps, also helped by earlier holiday merchandising / discounting as retailers get ahead of a shorter peak selling period. Especially higher-AUR and higher-margin seasonal categories seem to be bouncing back. TJX, GOOS, M, ANF, FIVE have all seen a strong start to Q4.

Seeing some early strength in higher-income spending. While trade downs continue, implying that consumer sentiment remains negative, consumer spending seems to have largely recovered. Multiple companies cited strength amongst higher-income consumers in particular as a growth driver this quarter (M, JWN, TPR, GPS).

Despite tough China macro, international growth often outpaced Americas - e.g. TPR, RL, TJX, GOOS, PVH. Growth was strongest in EMEA for TJX and TPR, while APAC growth was strongest for RL, PVH, and GOOS, especially as these luxury brands increase their presence in China.

China tariffs less likely to impact biggest brands/retailers, which are already diversified and can easily pivot. Multiple brands noted that post-2019 tariffs they have already been diversifying their supply chains out of China. As a result, many brands have low China exposure (e.g. ANF, TPR). Off-price retailers have minimal international direct exposure and see a potential benefit from inventory pull-fwd (TJX, ROST, BURL). The biggest losers are likely small/mid size brands that depend heavily on China."

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