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We’re seeing the first of the big apparel retailers showing inability to pass through the cost increases that they otherwise planned. The industry needs this to prove aberrational, otherwise the 2H set-up will not be a pleasant one.  Our thesis is, and has been, banking on the latter.

The phrase “planning cautiously” appears to capture the tone coming out of Sales Day from more than a few companies. While there was still an exceptionally high number of beats relative to (company-set) expectations (17 of 23), we are beginning to see what may be the early signs of the meaningful roll in retail we expect in the 2H with margin pressure ratcheting both higher and sooner than anticipated.

Let’s recall for a moment that strong sales across the board were already baked into April numbers due to the holiday shift so of course the yy compares look solid, but in looking at the underlying 2-year comp trends that eliminate the shifts and noise, it just cracked for the first time since last July. That matters. We also had several retailers taking down numbers despite posting better than expected April comps (SSI and GPS) with at least Gap, Inc.  highlighting insufficient price increases resulting in more significant margin pressure than originally planned. If this unfolds as we suspect, the old adage “Sell in May and go away” may never be more true – particularly in retail. Remember that we don’t need to see everybody make Gap-ish comments, but simply need a few heavy hitters (like Gap, which accounts for a whopping 4-5% of US apparel retail sales) to put pressure on others who have otherwise planned more appropriately.

(clients that have not yet flipped through our industry overview outlining our scenario for a 4.5pt decline in industry margins this year, please contact sales at for a copy – we’d be happy to run through it with you).

SSS Callouts:

  • In a sign that higher product costs are proving more disruptive than some retailers have expected, not only did ARO announce lower sales and earnings, but both GPS and SSI took earnings expectations down despite better than expected sales. Our suspicion is that we are in the early stages of this trend.
  • The strongest performing categories were food/grocery (TGT, COST), women’s apparel particularly dresses (JCP, ROST, TJX), home/housewear (TGT, KSS, COST), and footwear particularly kid’s due to the holiday shift after several retailers highlighted it as a drag last month (ROST, KSS, JWN). Both COST and TGT highlighted electronics as a particularly weak category driven by persistent deflation.
  • TGT came in below expectations and at low end of their April comp guidance. This has been one of our favorite shorts this year for many reasons (see our 8/23 note “TGT: Multiple Targets”). The company’s May outlook of L-MSD implies a rollover in the 2yr trend – the company would have to post a +6% comp just to remain flat. That said, grocery posted a substantial improvement in April suggesting that P-Fresh remodels may finally be gaining traction. As the driver of an expected +200-400bps in incremental comp, the sustainability of such improvement will be one of the more scrutinized line items in next month’s release.
  • Consistent with recent results, ROST highlighted that pack-a-way counts for an even  higher percentage of total inventory to 48% up +1% from last month and compared to 33% yy driven by lower consolidated inventories up 29% down from 35% in March. The ability to offset higher costs with prior pack-a-way inventory is starting to become visible in results with stronger gross margins driving earnings upside.
  • JCP confirmed that it’s still comfortable with the level of inventory, but notably dropped the verbiage that it’s “in-line with sales trends” mentioned last month. While highlighting several outperforming brands including Sephora, American Living, and Liz Claiborne, internet sales contribution appears to be slowing up only ‘slightly’ compared to LSD-MSD increases of late. The company also highlighted that traffic at off-mall stores continues to outperform mall-based locations.
  • COST further confirmed our view on inflation with food and sundries up ~3% (from LSD) and fresh food across all departments now up MSD-to-HSD (from LSD). In addition, gas contributed +3.5% and +4.6% to SSS for both COST and BJ respectively.
  • As expected, weather received frequent mention including from JCP and FRED both of which missed expectations. By and large performance was strongest in the Southeast and West (JCP, ROST, TGT, GPS, JWN, KSS, COST)
  • Weekly trends were strongest in Week 3 in advance of Easter with Week 4 commonly cited as the weakest due simply to the loss of a sales day – JCP was the only retailer to note Week 2. COST was the only retailer to highlight Easter as a negative event during the month impacting comps by -1.5%-2%.

Retail: Showing Some Crack - TGT MoGrid 5 11


Retail: Showing Some Crack - SSS Total 5 11


Retail: Showing Some Crack - SSS YR1 5 11


Retail: Showing Some Crack - SSS 2 YR 5 11

Casey Flavin