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The latest month's data (March) shows the greatest diversion we've seen in cost vs. consumer price in almost four years. A measly $0.35 per garment might not seem like much. But For an industry that sells 19bn units per year, that extra $0.35 per unit comes out to an incremental $560mm in profit that was freed up in the apparel retail supply chain. This was not a onetime event, and plays into our 2H margin call.

There are two components of the CPI that are misunderstood.

1) The yy change in CPI for a given category is meaningless without looking at the cost side of the equation to manufacture and import. The rate at which one changes compared to the other is what is the primary margin driver is for the supply chain. (I.e. I am fine with a given increase in costs as long as the consumer is willing to pay for it and then some).

2) Wall Street looks at CPI based on a yy % change. This is flat-out wrong - at least in retail. Why? In apparel, for example, the average import cost is $3.50, while the average retail price is around $10. We'd need roughly 3x the % change in import costs to equal the same percent change at retail. This makes the positive divergence in the chart below even more noteworthy.

Don’t Look Through This!  - 5 17 2009 9 22 04 PM