That’s the key for retailers this earnings season: Margins have held up, even amid tepid sales trends, which has helped drive earnings ahead of expectations. It’s clear from the past few weeks that consumer spending overall remains fairly cautious. Shoppers are scrutinizing more carefully when purchasing discretionary items. This all contributed to a fairly lackluster retail sales this earnings season. Most retailers saw their revenue or same-store sales figures miss or meet Wall Street expectations. There are very few sales beats. Despite stagnant sales numbers, there were plenty of earnings beats, with some more egregious surprises Wednesday morning from Kohl’s and Abercrombie & Fitch. One major reason for the strong earnings performance: Retail margins have been holding steady. Several factors contributed to the solid margin performance this season. Retailers Avoid Deep Discounts Despite tepid shopping trends, we haven’t seen many mentions of retailers resorting to deep price cuts this season. The absence of these discussions is striking. Stores avoided fire sale clearance situations. Even struggling retailers like Kohl’s didn’t mention extreme promotions in their earnings reports. Some retailers have actually talked up lower markdowns: Target cited “lower clearance markdowns” as a factor in favor of gross margins. Urban Outfitters saw “significant improvement in gross margin.” This is the result of “lower markdowns on Anthropologie Group and Free People Group branded items.” Reduced Shipping and Shipping Costs Another major pandemic cost driver has been increased shipping costs for retailers. Those costs appear to have fallen in recent months. The mention of this season continues what we heard from the retail industry three months ago. Urban Outfitters commented: “The increase in gross margin was primarily due to higher initial merchandise markups across all three brands, primarily due to lower inbound shipping costs.” Abercrombie & Fitch’s gross margin improved, “primarily due to 760 basis points benefit from lower freight rates.” TJX said its margins were “primarily driven by higher-than-anticipated freight gains,” while merchandise margin growth “was driven by significantly lower freight costs.” revenue-driven”. Solid cost control While retailers have benefited from more favorable inventory levels and shipping rates, many of them have also done a good job reducing general expenses and controlling those costs, even as labor wages remain high. In many cases, we see lower selling, general and administrative (SG & A) expenses helping operating margins. Walmart posted better-than-expected operating margin growth, driven by “operating expense leverage.” Lowe’s operating margin topped expectations, driven by an 11% decline in SG&A costs. Bath & Body Works sees “early benefits from our cost optimization program.” Kohl’s SG&A expenses fell 4.2%, outpacing a 3.3% decline in net sales. VF Corp’s SG&A expenses fell 5% year-over-year, outpacing a 3% decline in revenue. There are a number of more important retail earnings reports coming up next week. Thursdays have Best Buy, Dollar Tree, Ralph Lauren, Costco, Gap and Ulta. Next week, we have department store giants Macy’s and Nordstrom. Capri, the parent company of Dollar General, Lululemon, PVH and Michael Kors, will also report.