Retailers warn of business impact of Russian invasion

Employees place wooden shields on the window of the Louis Vuitton store in Kiev on February 24, 2022 as Russian ground forces invaded Ukraine from multiple directions today, encircling the country hours after the Russian President announced its decision to launch an assault.

Sergei Supinsky | AFP | Getty Images

Rising inflation and global supply chain strains remain a top concern for retailers as they navigate the post-holiday earnings season. But Russia’s invasion of Ukraine, which entered its second week on Thursday, is also making its way into conversations with analysts and investors.

A number of retailers have temporarily halted their business in Russia, either as a sign of corporate condemnation of the war or because those companies are unable to operate in the country due to sanctions imposed with a impact on logistics.

Some, like Victoria’s Secret, warn that the uncertainty created by the war could weigh on activity in the first quarter and potentially beyond.

The biggest concern for many retailers will likely be how long the crisis will last, said Gordon Haskett analyst Chuck Grom.

“You have to think the longer it goes on, the more problematic it becomes,” Grom said. “In other words, the consumer spends more time absorbing themselves into the situation.”

Retailers are already trying to gauge future demand in still unpredictable times and keep shelves stocked without ordering too much merchandise. Companies are trying to lure consumers into their stores as Covid cases decline and immunity rises. Still, that could prove trickier than a year ago, when President Joe Biden and Congress approved stimulus payments to families.

Pittsburgh-based clothing retailer American Eagle Outfitters said on Wednesday it takes into account the war between Russia and Ukraine when forecasting its outlook for the year, although it did not gave details of the financial impact the war could have on consumer demand. . American Eagle does not operate physical stores outside of North America and Hong Kong, but ships goods to 81 countries.

Chief Financial Officer Michael Mathias said on an earnings conference call that the retailer is aware of several factors currently at play: rising inflation, the fact that American Eagle is beginning to outgrow a period in which stimulus payments were issued to many consumers last spring, and continued disruption to the global supply chain, “including the war in Ukraine.”

“In this context, we are adopting a cautious attitude,” said Mathias.

American Eagle has warned that its profits will decline in the first half of the year from year-ago levels, largely due to rising transportation costs. He expects earnings to rebound in the second half.

Lingerie retailer Victoria’s Secret, which has a small presence in Russia, also made a slight mention of the war. When it released its fiscal fourth quarter results on Wednesday, it said inflation and “global unrest” will create a difficult environment in the months ahead. Victoria’s Secret released a disappointing outlook for the first quarter, but said it believed the third quarter would be an inflection point for better results.

Kohl’s chief executive, Michelle Gass, was asked during an earnings conference call with analysts on Tuesday about the situation in Ukraine and how it could hurt the department store chain’s business.

“We’re prepared for there to be an environment of a lot of uncertainty. We’ve certainly considered that as we’ve been guiding this year,” Gass said on the call. “We will remain close and responsive.”

Retailers are closing stores and making contingency plans

All of this could weigh heavily on the American consumer. Businesses from food producers to automakers will likely bear a heavier burden from soaring oil prices and ongoing supply chain headaches. Price increases are often passed on to the customer.

“There are implications for U.S. retailers in the higher cost of energy, due to the disruption and disruption of energy markets,” said David French, senior vice president of government relations. to the National Retail Federation, the leading retail group. “And there are implications for US retailers on food prices, given the importance of Ukraine and Russia … as major agricultural regions.”

“Those are probably the most important first-order effects,” he said, adding that many US-based retailers had modest exposure to Russia and Ukraine, if any. He did, however, mention that Ukraine is a major hub for companies outsourcing IT help, which could become a bigger issue if the crisis persists.

French pointed out that even during the pandemic, consumers have reported that their confidence is down, but at the same time they are buying as if consumer confidence is up. Holiday retail sales in 2021 jumped a record 14.1% from year-ago levels, according to NRF, despite inflation and the spread of the omicron variant.

BMO Capital Markets analyst Simeon Siegel echoed that sentiment. “Leaving aside what it says about humanity, as we’ve learned with Covid, people are really good at not letting things bother them until they knock on their door,” said Siegel said.

At the same time, companies quickly took a stand on the Kremlin’s invasion of Ukraine.

Furniture retailer Ikea announced on Thursday that it was closing all of its stores in Russia, halting production in the country and halting all exports and imports to and from Russia and Belarus.

“War has both a huge human impact and is causing severe disruption to supply chain and business conditions, which is why business groups have decided to temporarily suspend Ikea’s operations. in Russia,” the company said in a statement.

Nike, fast fashion retailer H&M and coat maker Canada Goose also announced they were suspending sales in Russia.

A statement on the Nike Russia website indicates that the sneaker giant cannot currently guarantee delivery of the products to Russia. A Nike spokeswoman told CNBC that given the rapidly evolving situation, as well as increased operational challenges, Nike has decided to suspend operations in the region.

“We are deeply troubled by the devastating crisis in Ukraine and our hearts go out to all those affected, including our employees, partners and their families in the region,” the spokeswoman said.

British online fashion retailers Boohoo and Asos have also suspended sales in Russia. On Thursday, off-price retailer TJX said in a securities filing that it would sell its 25% stake in Russian discount clothing retailer Familia, which has more than 400 stores in Russia. Following the sale, TJX said it may have to report impairment charges.

Craig Johnson, founder of retail advisory group CGP, said he expects retailers or brands with a presence in Central and Eastern Europe are likely to already be making, or even implementing, contingency plans.

“Contingency plans are most critical for store and back office employees and hours of operation,” Johnson said. “But they also include plans for physical and cybersecurity, communications with suppliers and the public, and reducing or delaying receipts of goods, if necessary.”

This story is developing. Please check for updates.

Christi C. Elwood