Episode 20: VBA Assessment Series: Retail's Financial Fallout from the Pandemic (Part 2)

Announcer: Welcome to this episode of “60-second Retail” - a BDO podcast keeping you in-the-know on events and trends in retail and consumer products industry impacting your bottom line, in just a few short minutes.

Natalie: Hello, my name is Natalie Kotlyar. I am the National Leader of the Retail and Consumer Products industry group at BDO USA. In this episode, we are again discussing BDO’s proprietary VBA Assessment tool with Anthony Alfonso, Principal & Leader of the Valuation & Business Analytics group at BDO USA, to take a closer look at the financial fallout of the pandemic, in terms of revenue, stock price and earnings.  Welcome Anthony.

In our last episode we talked about the revenue impact the pandemic has had on specific retail sectors, I’d like to focus now a bit more on the financials – specifically whether earnings have also been impacted?

Anthony: They have, and just due to the operating structure of some of the retail environments and having some of the fixed costs that are harder to overcome, you see a bit of a leverage effect.

In the previous podcast, we talked about discretionary luxury, and their revenues were down unfortunately 12%, not surprisingly.

But the EBIT itself has been down 57%. I think you could kind of assess that as discretionary luxury. People want to see it, feel it, touch it, so that tends to be more brick and mortar, which higher operating costs and the like, so it doesn't surprise me, that with a smaller decrease in revenues, you have a larger decrease in earnings.

From the consumer staples side, while again, a lot of it is grocery stores and that type of stuff, brick and mortar… we had an increase in revenue of 2%, which was not completely surprising because of the lack of travel, people being home – the increase in revenues resulted in a decrease in EBIT of about 3%.  Probably a lot of it is due to the fixed costs that they have to carry and not being able to completely cover fixed costs.

On the online side, revenues were up 10%, but EBIT itself on online was up 14%.

So, there’s a swing – positive, negative - but a lot of it has to do with the operating leverage.

Natalie: Absolutely.  Especially in times like these, when a lot of people are going to eCommerce. The shipping and all of those types of fixed costs you mentioned are certainly going to play an impact.  How do you see this impacting stock prices for the public companies?

Anthony: Yeah.  So that's the ironic part. While you know, depending on the category – retail luxury being down and the like, consumer staples being flat or down-ish – but on the online side revenues and earnings being up, it's interesting on the stock price side.

The stock market seems to be ignoring this. So despite the earnings decrease and revenue decrease, discretionary luxury is actually up 5%.

Consumer staples itself, is up 12%. Which I do find interesting.  But the real winner is online and with the increase in revenues and increase in EBIT, the stock price you know in aggregate has really been up an astounding 70%.

Natalie: That is really incredible, especially during the pandemic and some uncertain times. What do you think is causing some of the disconnect between the earnings and the stock price?

Anthony: I think the markets are really discounting the longer term of the pandemic.  I mean, we're living through it, we all know it. We all know there's going to be an end in sight.  No one can predict when it’s going to be, but we know there’s going to be an end.

On the discretionary in luxury, buyers probably aren't as impacted by the pandemic – other than the inconvenience.  But maybe from a financial side, may not be as impacted on the pandemic side.

I think the consumer staples they speak for itself. These are necessary items for our daily lives.
Then online, as we’ve discussed, is fairly obvious, just given the COVID concerns, public gatherings and reduced capacity in the brick and mortar stores, people are ordering more things and having it shipped directly to them.

Natalie: Great. Thank you, Anthony.  We look forward to having you as our guest again next quarter.

Anthony: Thanks Natalie.

Announcer: And that concludes this episode of BDO’s “60-second Retail” podcast.  Don’t forget to tune in for the next episode!  To find more information on our hosts, guests, BDO’s services, or listen to previous episodes of “60-second Retail”, please visit www.bdo.com/60-second-retail.



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