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More reasons to be short vs long coming out of June sales. 

Our major themes and ideas remain largely unchallenged by June SSS. 

1) Battle taking place for dominance in the mid-tier, with ensuing ripple effect through supply chain. Short M, JCP, KSS, JNY, HBI, CRI

2) Off-price retailers taking disproportionate share from the mid-tier -- which will be tough to recapture (psychologically and economically). Short JCP -- though the off price model is not being challenged today, but it will be in 3-6 mos -- a consideration for TJX and ROST.

3) May of last year was when the draw down in saving and increase in revolving credit first started to benefit personal consumption. This trend accelerated from July through September at which point it accounted for more than half of the increase in consumption. As such, come 2H personal consumption growth at the current rate is likely to become increasingly stressed.


Mid-Tier Remains in the Spotlight: of the 10 misses reported this morning, KSS (-4.2% vs +2.8E), GPS (0% vs. +0.4E) and M (+1.2% vs. +2.5E)  were noteworthy given the market share JCP has put up for grabs.

KSS: KSS highlighted Men’s as the outperforming category though its comp was flat in June- all other categories were negative. Interestingly, KSS only provided inventory unit growth which was +2% in June. In May however, unit inventories were down -5% with dollar inventories +7% on -2.6% revenue growth creating a ~-10% sales to inventory spread. With sales -2.6% again in June (and unchanged from May), the +2% unit inventories relative to -5% in May suggests a further deterioration in the spread. While KSS guided Q2 to the low end of its $0.96-$1.02 range (in line with consensus at $0.96), July comps need to come in +6.5% to hit the consensus -1.3% Q2 comp.

GPS: Although GPS’ June performance was just shy of expectations, there was a notable acceleration in the underlying 2 yr trend across all concepts domestically (int’l slowed). Regardless, it’s no surprise that GPS is comping years of a contracting business and will need to accelerate growth further to meet expectations with FY12 guidance sitting at $1.78-$1.83 relative to consensus of $1.94E.

M: While we don’t consider M (+1.2% vs. +2.5E) to be a mid-tier retailer, the month’s miss is notable in that M has been the only company to outright attribute some of its strength to share gains from JCP. Recall M guided June comps to be slightly below the +3.5% Q2 guidance suggesting the month’s performance was shy of internal expectations. M now needs to comp +6% in July to reach the +3.5% consensus (and guided) Q2 comp which implies a 150bps acceleration in the 2 yr trend relative to June- no easy task. A slowdown at M as well as light results out of GPS  & KSS suggests more share is being eaten up by the off pricers.

No Slowdown for Off Price Retail: ROST (+7% vs. +4.5E) and TJX (+7% vs. +3.3E) both posted strong June beats with 2 yr comps accelerating sequentially for both retailers. Both companies increased guidance for the quarter and highlighted inventories as a positive. ROST average in store inventories ended -5% in June with TJX describing them “in great shape and turning fast.” We expect JCP customers to continue to flock over to off price concepts and see little pricing risk in the subsector given excellent inventory positioning headed into 2H.

High End Rebounding: After a slowdown relative to mid and low end retail over the past 2 months, JWN (+8.1% vs. +4.2E) & SKS (+6% vs. +4.2E) posted strong June results. Outperformance drove a boost in the spread between high-end retail and the rest of the Monthly comp sample to 4 points vs. 1 point in April. Notably, JWN highlighted sales as consistent throughout the month with the final week the strongest suggesting high end strength headed into July.

LTD: LTD continues to outperform (+7% vs. +2.4E) posting the biggest beat in June (4.6 points) with Victoria’s Secret comps accelerating +11% at both Brick and Mortar and Direct. With sales growth improving sequentially (-0.3% vs. -6.3% in May) and inventories coming down (+10% per square foot vs. +11% in May), the sales to inventory spread jumped 7 points with LTD already highlighting merchandise margins as having been up significantly.

2H Setup Still Looking Weak - monthly SSS

 

2H Setup Still Looking Weak - high low chart

 

2H Setup Still Looking Weak - TGT grid