As the second quarter kicked off, consumers had some cash to burn. They had refunds from canceled summer plans and money they would typically spend out to dinner or at the movies, not to mention extra funds from government stimulus checks.
Yet many decided to skip the mall. Instead, they bought computers, home decor, groceries and supplies for do-it-yourself projects from big-box retailers.
The coronavirus pandemic and resulting lockdowns have underscored the widening gulf between retail's haves and have-nots, as shopping picks up again and American consumers vote with their dollars. Last week, Walmart, Target, Lowe's and Home Depot reported tremendous sales gains and blew away Wall Street estimates. But Kohl's and L Brands posted double-digit sales declines. As more retailers report results this week, investors will likely see similar patterns.
Best Buy, which reports earnings Tuesday morning, is expected to benefit from stay-at-home trends as people work and attend school remotely. Later Tuesday, Nordstrom will offer another look at the struggles of department stores. Gap, which reports Thursday, could note how it pivoted to selling masks when fewer shoppers were buying office attire.
Meantime, a number of mall-based retailers, like J.C. Penney, J.Crew and Brooks Brothers, have filed for bankruptcy this year. Many were already in trouble before the pandemic hit, as consumers increasingly shopped online or ventured to places like Target where they can get their groceries and a new pair of shoes in the same trip. More bankruptcy filings are expected before the year is over.
About halfway through their fiscal year, mall-based retailers have seen their earnings plunge 256%, according to data from Retail Metrics. So-called off-mall companies, which would include Home Depot and Walmart, have altogether reported an earnings decline of just 0.6%, the firm said.
The pandemic is exacerbating a divide that began before the global health crisis. Mall-based retailers have underperformed their off-mall competitors in 19 of the last 20 quarters, Retail Metrics founder Ken Perkins said.
'Target's in that winning column'
Retailers that have so far posted strong second-quarter numbers entered the pandemic on better footing. They had stronger balance sheets and previous investments in their digital businesses that teed them up for success — even during an unforeseen global health crisis.
"In a really crass way, the pandemic has shown a very bright light on who the best are," said Moody's retail analyst Charlie O'Shea.
Target is one company that's illustrated the sharp contrast. It has picked up 10 million new digital customers and $5 billion in market share during the first half of the year.
"We're clearly seeing in retail today winners and losers, and I'm really proud to say that Target's in that winning column today," Target CEO Brian Cornell said last Wednesday on CNBC's "Squawk Box."
Walmart and Target had both expanded e-commerce services, such as curbside pickup and delivery. Lowe's had improved its website as part of a broader turnaround effort. And Home Depot had made significant investments to its supply chain.
Other strategic decisions also paid off. Target capitalized on its approach of using stores as online fulfillment centers and launching in-house brands. It had launched a new activewear line, All in Motion, less than two months months before the pandemic struck the U.S. and much of the country's workforce began to work from home in casual clothes.
And the big-box retailer had other unique advantages. As essential retailers, they could keep their stores open as some competitors were forced to shut during shelter-in-place orders. They had huge assortments of merchandise that made them one-stop shops as customers made fewer trips to the store because of safety concerns, including the food, electronics and DIY supplies Americans sought as they spent more time at home. And while some pulled back because of unemployment, others spent stimulus checks or had money to spend as they scaled back vacations and couldn't go out to restaurants during the pandemic.
Company executives acknowledged last week, however, that at least some of those factors could fade. Walmart said it got a bounce as customers spent their stimulus checks on TVs, apparel, groceries and other goods. That tapered off in July, however, after consumer spent their windfall. Chief Financial Officer Brett Biggs told CNBC that the retailer is watching Washington, D.C., to see if there will be another stimulus check, which could help consumers and its bottom line.
Target CEO Brian Cornell and Lowe's CEO Marvin Ellison said in interviews that they benefited from customers spending their dollars differently. Instead of going out to dinner or on a far-flung vacation, customers bought tech items to help them work remotely, redecorated their homes and turned their backyards into places to relax.
"We're not on planes," Cornell said in a "Squawk Box" interview. "We're not spending dollars on lodging, so many of those dollars have been redirected into retail."
Yet big-box retailers also got a chance to deepen relationships with customers. As they stayed open as essential retailers, they got a head start on figuring out how to operate during the public health crisis. They handed out masks, put social distancing decals on floors and adopted contactless services like curbside pickup.
Some used that as a way to connect with customers and strengthen their brands. Walmart ran a TV commercial that featured its hourly workers singing "Lean on Me" and another in which CEO Doug McMillon described workers as heroes for checking out customers and stocking shelves as Covid-19 cases surged.
And some habits developed during the pandemic could stick, too.
Home Depot CEO Craig Menear said on the company's earnings call last Tuesday that consumers may keep up do-it-yourself projects well into the future as they grow comfortable painting walls, building decks and making repairs themselves. More time stuck at the house also causes more wear and tear, creating additional home improvement tasks, he said.
Lowe's CEO Marvin Ellison said that customers' comfort with their stores and their safety measures will keep them coming back, even as rivals reopen.
Bankruptcies mounting
For retailers teetering on the edge before the pandemic started, it's a different story.
"When you look at a lot of the retailers that have been falling … and look at who was in trouble going into the pandemic, a lot of those guys didn't make it," Moody's O'Shea said. "It was too much debt without the financial flexibility to invest."
Those that have filed for bankruptcy this year include department store chains Neiman Marcus, Stage Stores J.C. Penney and Lord & Taylor. The suit makers Brooks Brothers and Jos A Bank owner Men's Wearhouse both succumbed to filing for bankruptcy during the pandemic, as their male customers stocked up on sweat pants and t-shirts to work from home, not button-down tops and dress pants. Other victims include J.Crew, Sur La Table, Stein Mart and Ann Taylor-owner Ascena Retail Group.
Some will liquidate their businesses, kicking off hundreds of store closures and going-out-of-business sales. The off-price chain Stein Mart, for example, is shutting 380 stores. In total, more than 7,000 permanent store closures have been announced by retailers so far this year, according to a tracking by Coresight Research. The firm has predicted closures could hit a record 25,000 by the time 2020 draws to an end.
Meal-kit company Blue Apron and online furniture retailer Wayfair still remain high on S&P Global Market Intelligence's list of companies at risk of defaulting on their debt. Apparel makers J.Jill, Christopher & Banks and Destination XL Group are also at risk, it said in an analysis this month.
Billions in sales up for grabs
Every retailer that goes out of business becomes a new opportunity for another retailer. Kohl's Chief Executive Michelle Gass said she sees billions of dollars in market share up for grabs due to the distress the pandemic has inflicted on some of its peers. But it's unclear exactly how much of that market share Kohl's will be taking.
Kohl's sales fell 23% from a year ago during its fiscal second quarter, and it offered up a grim picture of the holiday shopping season. Back-to-school sales have started "soft," and it is planning conservatively for the latter half of the year.
"Stabilization is the goal for a lot of these guys right now," Moody's O'Shea added. "It's about stemming the tide and getting away from the negative momentum."
Michael Lasser, a retail analyst for UBS, said consumers will likely continue to divide their dollars in more directions. They'll go out to restaurants and bars and travel, as the spread of Covid-19 slows or fades away. Yet he said the retailers that put up big numbers will continue to benefit from the struggles of others.
"Some of it's just going to happen through the laws of economics because there will be marginal retailers that aren't able to make it and they'll go away," he said. "We've already seen that, but maybe not even to the full magnitude."
—CNBC's Amelia Lucas contributed to this report.
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