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Focus on the CPI all you want…but the government’s Office of Textile and Apparel printed its import/export numbers for the Month of March (it lags CPI by a month). The total price index came in +9.14% yy – a simply stunning sequential increase from the +3.55% number we saw in Feb.  No revelations here, as the world knows that higher costs are on the way. But these readings are going to test – if not go over – 20% within 4 months.

These goods were at BEST on shelves in late April, but more realistically are being put out there for us to buy right now – just in time for what Kohl’s and Macy’s both said was ‘pent up’ demand into May.  They’d better be right – especially given Gap’s comment that price increases being accepted by consumers less than expected. Again, this was before the acceleration in inventory costs.

Yeah…I know. This sounds so consensus. But check out the following charts.

1)      The MVR and the RTH won’t acknowledge the simple fact that the industry is about to face its largest margin deficit in history. 

Retail: Spread 'Em - Snag2

2)      Industry margins vs the spread in CPI/Import price is extremely distorted. We think it will get worse, which is unfortunate given the historical relationship that exists (and flow through to stock prices).

Retail: Spread 'Em - Snag

3) The industry is sitting at peak margins. The consensus – which is thinking in baby steps – has margins down about 30bps this year. We, however, calculate $8bn in margin risk, or about 4.5points for the year.  

 Retail: Spread 'Em - Retail Operating Margins

In our black book presentation “4.5 Below” we presented the following table demonstrating the math. Email Sales@Hedgeye.com if you are interested in receiving a copy or would like a larger of the [probably tiny and illegible] table.

Retail: Spread 'Em - Margin Table

Brian McGough

Robert Belsky