Mid-Tier Math Not Adding Up

Overall, an in-line-ish month for sales. Beats outnumbered misses by 2 to 1. But the standard deviation was generally benign. Not a surprise given that we just passed retail earnings season, and June – not May – is the real important month for the quarter.

We wonder if Ron Johnson is adding up where his lost revenue dollars are going. It’s not KSS. GPS and M can’t account for it. Enter the off-price retailers. Not only will he need to recondition the consumer to buy full price, but to stop treasure-hunting. Good luck.

No Shade for the Mid Tier: Of the 5 misses this morning, GPS (+2% vs. +2.2E) and KSS (-4.2% vs. -0.7E) were two of the most notable in light of DDS & JCP pulling out of the sample earlier this year. As we’ve highlighted in the past, mid tier retail will become increasingly vulnerable to share losses in 2H as pricing remains uncertain despite the expectations for margin expansion in light of easing costs.

Think of it like this…If we were to assume that JCP sales in May were down similar to the (-20%) decline we saw in 1Q12, that would equate to ~$240mm in mid tier dollars up for grabs. That alone makes Kohl’s and Macy’s lives easier. Macy’s sales were up $80mm. But KSS was DOWN $35mm?? Anyone want to explain that one? Either JCP is getting much better – which it is not, or there are other retailers scooping up the share. KSS is missing the boat here big time.

The kicker is that the off price retailers are taking share. Why? They’ve got the goods, and the consumer LOVES a bargain. I wonder if Ron Johnson knows that he’s going to have to not only condition the consumer away from looking for bargins in full price stores, but now he’ll have to worry about battling the value proposition at off-pricers as well.  

GPS: While GPS’ +2% comp miss was minor and expectations ran up from +1.4% to +2.2% into this morning’s print, each of GPS’ businesses’ underlying 2 yr trends eroded 200bps+ sequentially with the exception of international though it remained (-4%). While May only accounts for 31% of 2Q sales for GPS, June accounts for closer to 41% and although top line compares ease into 2H, they become more difficult in June first.

 

KSS: Aside from BKE, KSS was May’s biggest laggard with comps -4.2% vs. -0.7E. Most notably, KSS’ sales were -2.6% on a +7% increase in inventories driving the month’s sales to inventory spread to new lows -11.2% from -5% in 1Q12. This just after KSS announced they would be implementing a new EDLP strategy in response to JCP’s “Fair and Square” roll out. In the first quarter, with e-commerce sales +34% and new stores contributing ~1.7 points to the 1.9% top line growth, we estimate the core brick and mortar business contracted LSD. We continue to like KSS on the short side in light of the mid tier domino effect that we expect to play out further in 2H as both top and bottom line compares get increasingly difficult over the intermediate term. 

Off-Price Outperformance: ROST and TJX continue to outperform the SSS group as a whole coming in +8% vs +4.8E and +8% vs 4.9E, respectively, bucking consensus by 300bps+ each, the 2 largest beats on the morning excluding the smaller cap participants (CATO, SSI, BONT, ZUMZ). The spread between the consolidated off-price comp and the total SSS comp remains prevalent at about +4.5 points wide. Given our expectation for pricing to break down across the mid tier in 2H12 driven primarily by JCP/KSS EDLP, off priced retailers have the opportunity to capitalize on industry-wide inventory growth with better buys and a value proposition that already resonates with the consumer. In other words, the quality and availability of goods in the off price channel will only go up from here.

ROST: Posted revenues +13% with inventories -1% maintaining a mid teen sales to inventory spread.  

 

TJX: Sales came in +10% accelerating sequentially over +7% growth in May. TJX highlighted inventories as being “in great shape and turning fast” this morning following the 1Q12 inventory spread jumping 11 points from 4Q11 to +15% with inventories -3% headed into May. 

High End Remains Strong: High end retail (SKS, JWN, M) exceeded expectations in May with JWN comps in line (+5.3% vs. +5.3E), SKS beating (+4% vs. +3.3E) and M delivering 20bps of upside driven primarily by online +42% in May and 36% YTD. While the consolidated high end comp accelerated 200bps to +5%, the spread between high and low end contracted slightly on the margin from 10 points to 6 points.

COST: After uncharacteristically missing April consensus for the second month in a row in April, COST posted a 3 peat this morning with comps +4% vs. +4.4E. Gasoline deflation and FX combined negatively impact comps by 150bps though all major categories posted positive comps and AUR remained flat despite gas prices declining slightly from $3.86 to $3.84 year over year. 

Mid-Tier Math Not Adding Up - KSS SIGMA

 

Mid-Tier Math Not Adding Up - TGT monthly sales grid

 

Mid-Tier Math Not Adding Up - monthly SSS comp

 

Mid-Tier Math Not Adding Up - total SSS comp