ECONOMY

Retailers warn of business impact from Russia’s invasion

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Employees put wooden shields on the window of Louis Vuitton shop in Kyiv on February 24, 2022 as Russia’s ground forces invaded Ukraine from several directions today, encircling the country within hours of Russian President announcing his decision to launch an assault.

Sergey Supinsky | AFP | Getty Images

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

A number of retailers have temporarily halted operations in Russia, either as a signal of corporate condemnation of the war or because these companies are unable to carry on business in the country due to imposed sanctions impacting logistics.

Some, such as Victoria’s Secretare warning that uncertainty created by the war could weigh on business in the first quarter and potentially beyond.

The biggest concern for many retailers will likely be the duration of the crisis, said Chuck Grom, an analyst with Gordon Haskett.

“You have to think the longer it goes on, the more problematic” it gets, Grom said. “In other words, the consumer spends more time getting absorbed with the situation.”

Retailers are already trying to gauge future demand in still unpredictable times and keep shelves stocked without ordering too much merchandise. Businesses are trying to lure consumers back into their stores as Covid cases wane and immunity increases. Yet it could prove to be trickier than this time a year ago, when President Joe Biden and Congress signed off on stimulus payments to families.

Pittsburgh-based clothing retailer American Eagle Outfitters Wednesday said it is taking the war between Russia and Ukraine into consideration when forecasting its outlook for the year, though it didn’t offer specifics on how much of a financial impact the war could have on consumer demand. American Eagle doesn’t operate any brick-and-mortar shops outside of North America and Hong Kong, but it ships merchandise to 81 countries.

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

“Against this backdrop, we’re taking a cautious view,” Mathias said.

American Eagle warned that its earnings will decline in the first half of the year compared with prior-year levels, in large part due to heightened freight costs. It does expect earnings to rebound in the back half.

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

Kohls Chief Executive Michelle Gass was asked Tuesday, on an earnings conference call with analysts, about the situation in Ukraine and how it might hurt the department store chain’s business.

“We’re prepared that there’s going to be an environment of a lot of uncertainty. We certainly contemplated that as we guided this year,” Gass said on the call. “We’ll stay close and be responsive.”

Retailers shut stores and make contingency plans

All of this could weigh heavily on the American consumer. Companies, from food producers to auto makers, will likely bear greater burdens from skyrocketing oil prices and ongoing supply chain headaches. Price increases are often passed on to the customer.

“There are implications for US retailers in the higher cost of energy, because of the interruption of and disruption in energy markets,” said David French, senior vice president of government relations at the National Retail Federation, the leading retail trade group. “And there are implications for US retailers in food prices, because of the significance of Ukraine and Russia … as major agricultural regions.”

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

English emphasized that even during the pandemic, consumers have been reporting that their confidence is down but at the same time they’re shopping as if consumer confidence is way up. Holiday retail sales in 2021 surged a record 14.1% from prior-year levels, according to NRF, in spite of inflation and the spreading omicron variant.

BMO Capital Markets analyst Simeon Siegel echoed this sentiment. “Setting aside what it says about humanity, as we learned with Covid, people are really good about not letting things bother them until it knocks at their door,” Siegel said.

At the same time, companies have been quick to take a stance on the Kremlin’s invasion of Ukraine.

Furniture retailer Ikea said Thursday it is closing all of its stores in Russia, stopping production in the country and halting all exports and imports to and from Russia and Belarus.

“The war has both a huge human impact and is resulting in serious disruptions to supply chain and trading conditions, which is why the company groups have decided to temporarily pause Ikea operations in Russia,” the company said in a statement.

Nikefast-fashion retailer H&M, and coat maker Canada Goose have all said they’re suspending sales in Russia, too.

A statement on Nike’s website in Russia says the sneaker giant can’t currently guarantee product delivery in Russia. A Nike spokeswoman told CNBC that given the rapidly evolving situation, along with increased operational challenges, Nike decided to pause its business in the region.

“We are deeply troubled by the devastating crisis in Ukraine and our thoughts are with all those impacted, including our employees, partners and their families in the region,” the spokeswoman said.

British online fashion retailers Boohoo and Asos have also both suspended sales in Russia. On Thursday, the off-price retailer TJX said in a securities filing that it would be selling its 25% stake in the low-cost Russian apparel retailer Familia, which has more than 400 stores in Russia. As a result of the sale, TJX said it may have to report impairments charges.

Craig Johnson, founder of the retailer consulting group CGPsaid he expects that retailers or brands with a presence in central and eastern Europe are likely already developing, if not implementing, contingency plans.

“Contingency plans are most critical for in-store and back office employees and hours of operations,” Johnson said. “But they also include plans for physical and cyber security, vendor and public communications, and trimming or delaying merchandise receipts as warranted.”

This story is developing. Please check back for updates.

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