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Pick Your Poison

Pick your poison.

There were definitely some interesting call outs from this mornings sales reports. The biggest is that true underlying demand is far less variable than the spreads between beats and misses would otherwise suggest.

The point is that the majority of companies that beat on the sales line did so at the expense of margins. Those that missed sales big (GPS, KSS) kept margins in the stratosphere.  There was not much in between.

What does all this mean?

As for the month, we'd characterize this as an in-line month relative to expectatons with 14 companies coming in better than expected compared to 8 misses, with a slight deceleration in overall spending. That said, at better margin rates, the flow through impact to the companies made up the slack.

One consideration is that Retailers have been touting the 'sell less at higher prices' theme for the better part of nine months.

They're selling now what they ordered 6-9 months ago when they hunkered down on their unit deflation cause.  Thats when cotton was over $2 and there was nothing but fear in their eyes.

Now fast forward, and in 2H the industry starts to sell the goods they ordered at 20%+ higher prices, which is something that will last for 9-12 months. That is the crux of our '4.5 below' call as this cost pressure will start the domino effect causing companies to react irrationally as their supply chain partners and competitors chase incrementally over margin dollars.

And another thing...we all know how these retailers think...'Hey, if I can sell a thousand shirts at $11 instead of $10, next season I bet I can sell 2,000 shirts at the same price.'. Add on the fact that cotton has dropped by a buck, and this will almost certainly add to their confidence.

The point here is that these numbers reported are 1H. That's water under the bridge. It's time to look forward. The market is not. We maintain our negative view on the space.

Shorts: JCP, JCP, and JCP. HBI, GIL, COH

Longs: WMT, LIZ, TGT, NKE

 

Pick Your Poison - SSS Total 8 11

 

Pick Your Poison - SSS 1yr 8 11

 

Pick Your Poison - SSS 2yr 8 11