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    MARKET EDGES

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Today’s October sales results can best be characterized by the term, “disconnect”.  A disconnect between the reality of a slower topline and a day in which almost every publicly traded retail stock is moving higher regardless of the quality of its monthly report.  Miss on the topline, stock is up.  Beat on the topline, stock is up.  Pre-announce to the upside, stock is up.  Pre-announce inline, stock is up. 

The bottom line is that October was the weakest month of the quarter and yes, weather was partly to blame.  Sales momentum did slow in the month, only to recover a bit towards the end as more seasonal weather patterns emerged.  Promotional activity was also up on the margin, largely the result of retailers such as GPS looking to prevent an inventory overhang as the most critical selling season of the year approaches. 

Is there anything major to glean from October?   Probably not.  The consumer remains in a holding a pattern, only to emerge around key events.  Despite retailers efforts to jumpstart holiday shopping at the same time Halloween costumes hit the clearance rack, we believe we have a long way to go before any definitive judgment can be made regarding Holiday 2010. Despite the waiting game also known as “holiday anticipation”, there  are a handful of callouts that are worth noting from today’s releases:

  • Same store sales day inches closer to obsolescence with ANF’s announcement that it will cease to report monthly results beginning in fiscal ’11.  That leaves just three more months to trade the lights out on all the speculation, whispers, and channel checks one could possible consume.  The truth is, apparel retail is managed around seasons, not months.  Within the next 1-2 years, it’s likely we’ll see many of the remaining monthly reporters calling it quits as well.  For reference, monthly sales reports are a legacy item, unregulated, not mandated, and unaudited.
  • From ANF’s recorded call, “Sales for the quarter are approximately in line with expectations at the beginning of the quarter.”  Aren’t sales either in-line or not in-line?  Ambiguity.
  • ROST noted that as cooler weather trends materialized, customer traffic increased.  Dresses were once again called out as a leading category, as well has home.  Pack-away levels were also notable, with an increase of 500bps year over year.
  • JCP noted that early sales of the Liz Claiborne exclusive remain strong and ahead of management’s plan. Men’s apparel and shoes were the best performing product categories for the month.   Cold-weather sensitive categories including sweaters, outerwear, and fleece were weak.  Overall, management once again noted AUR pressure as a result of heightened promotional activity.
  • JWN reported that California trends still remain below the company average but that the spread between CA and overall results continues to narrow.  Jewelry, dresses, and women’s shoes were leading categories in the month.
  • Despite pressure on margins driven by increased clearance activity, GPS guided EPS above the Street for 3Q to $0.47-$0.48 (Street $0.44).  Interestingly, the tail end of the quarter and the first week of 4Q have included 40% off promotions at core Gap.  Recall it has been quite some time since a “40% off any item in the store” promotion has been used.  If you haven’t already checked out this coming Friday’s promo, it’s worth taking a look at: http://www.facebook.com/event.php?eid=159056334132258
  • Costco highlighted that food inflation picked up in October, driven primarily by milk, butter, cheese, and deli meats.  Overall inflation for all food and sundries was 1.5%, a measurable increase from prior months.
  • ARO reported that its AUR’s decreased by mid single digits as a result of increased promotional activity as well as a negative mix shift towards lighter weight merchandise. 
  • AEO reported that its average prices on apparel were actually up year over year.  However, the mix impact of higher sales of accessories and Aerie negatively impacted overall AUR.
  • Add Gymboree to the list of retailers noting that a heightened promotional environment had a negative impact on margins.
  • Despite what was believed to be one of the strongest Halloweens in years, only Hot Topic called out the holiday’s impact on the month. Unfortunately, Halloween proved to be disappointing for HOTT.  Historically, the retailer was a merchandising leader for Halloween.  However, decisions to dramatically cut back on punk pants, corsets, and fish nets had a meaningfully negative impact on monthly results.

Eric Levine

Director