Retail: Mess in the Middle


September sales came in ahead of expectations, but the fact that top-line strength doesn’t simply translate to commensurate bottom-line growth is becoming increasingly evident this morning. As suggested in yesterday’s note, ‘Retail: Pre-announcement Time,’ we are beginning to see an increasing rate of downward revisions in the space from the likes of JCP, WSTLA, and CBK. Yeh, we know…not exactly the crème de la crème. But we’re seeing pressure elsewhere as well – particularly in the mid-consumer zone. The higher end consumer continues to defy gravity and logic, with healthy comps at SKS, JWN and M (good for RL). Other signs of mounting margin pressure include COST posting better than expected comps yet missing earnings and KSS reducing its earnings outlook in a similar fashion yet citing a change in lease accounting for the entire difference. We still think that there will be an increased bifurcation between upward and downward revisions in retail over the next quarter, and throughout 2012.


Keep in mind, product today is sourced from the period when cotton costs were at the peak. But also when order levels where off by 10% with pricing up commensurately. These results show that -- at least in the mid-tier -- prices are not sticking, but at the higher end (JWN, SKS, and to a lesser extent M) they are. This trend will hold at a minimum through Spring when costs improve on the margin.


But that's when 2 things happen...

  1. More units will flow through the pipe based on the increased order trends we’re seeing today. What do we mean? This industry is extremely fragmented, and the buyers rarely employ a Macro process in their buying/ordering behavior. So over the summer their thought process sounded something like “If I could sell though above plan at a 10% price hike, I’ll take up orders by 5-10% in the Spring/Summer of 12 at the same price or better and make even more money.” (kind of like a farmer's 'chase the market' planting strategy). Translation = this really doesn’t work.
  2. At that time we’ll have to deal with JCP rolling the dice with EDLP strategy without yet having the product (sans Liz) to back it up).  We’ll also have KSS’ competitive response. JCP accounts for around 8% of the industry’s sales – KSS is another 9%. KSS is also licking its chops over what should be the mother of all sloppy transitions from Ullman to Johnson. 

A few additional callouts in September:

  • High/Low-end performance bifurcation persists. Within department stores, JWN +10.7%, SKS +9.3%, M +4.9% outperformed while BONT -3.6%, SSI -0.7%, and JCP -0.6% all underperformed. KSS +4.1% and TJX +4% came out somewhere in the middle.
  • Online performance continues to be another important callout for department store retailers heading into the holidays. Macy’s DTC channels ( and accelerated up +43% while JCP’s online business continued to decline down -3.8%. This channel continues to be a key pillar of strength for retailers not named JCP and remains a critical structural disadvantage for the retailer near-term.
  • TGT was a notable positive callout with comps coming in better than expected (+5.3% vs. +3.8%) driven largely by its PFresh initiative as well as turn in its home category for the first time in 12 months leaving hardlines as the only negative category. Retailers with exposure to grocery continue to post strong sales (TGT up mid-teen and COST up double-digits), however, we need to be mindful not to simply extrapolate stronger top-line sales given a lower margin profile for consumables.
  • Lastly, while GPS was able to fend off posting its third straight sales day disappointment (barely), its International business came in down -13% compared to -9% in August. Isn’t a growth engine supposed to go the other way?

The bottom line is that you upretty much want to avoid anything that remotely touches the mid-tier of the US market.


Shorts: JCP, SHLD, UA, HBI

Longs: TGT, NKE, LIZ, RL


Retail: Mess in the Middle - Total SSS Oct 11


Retail: Mess in the Middle - 1 year comps Oct 2011


Retail: Mess in the Middle - 2 yr comps oct 2011


Retail: Mess in the Middle - TGT Sales Grid Oct 2011



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