Let’s quantify the Bull vs. Bear case for input cost benefits in 2H. The math works out such that the industry MUST hold price in 2H. Even a 1% decline in retail price will stress the supply chain. We think we’ll see more.
The Bullish case for retail in 2H12 is largely predicated on lower cost cotton flowing through the P&L and retailers gaining back a substantial portion of the margins lost last year. The Bearish case acknowledges that raw material costs account for ~40% of cost allocation with Cotton accounting for 20% at best.
Think of the following…
Retailers Price: $10
Retailers Cost: $5-6
Wholesale Price: $5-6
Wholesaler Cost: $3
Manufacturer Price: $3
Mftgr Cost: $2.00-$2.50
Then look at the following chart. See how much of the manufacturer cost is related to raw materials – it’s around 40%. If we assume that cotton is ½ of raw materials (it’s actually less), and that cotton-substitutes and synthetics account for the remaining 50% (which are down, but not as much as cotton), we’re looking at much different math. That means that raw materials (including cotton) could be down by 20% in 2H, and we’re talking ~$0.20 per unit. And that’s assuming that labor, etc… is flat. In actuality, labor, which is now closer to 15%-20% of total cost is going up 10-15% per year or better. That knocks the net benefit down to about $0.15.
So $0.15 per unit is nice. But a) every CEO in retail, wholesale, and manufacturing sees it and thinks they’re going to keep it. B) the average consumer price reduction being put in place by Johnson and the JCP team is ~40% at the everday price.
Off a retail price of $10, we’re talking costs of $3-$5 per unit. If we see consolidated prices come down even 3% in 2H, it will offset the cost benefit everyone is eyeing by a factor of 2.
