Holiday Margin Pressure - Wages & Free Shipping, KSS Most At Risk
M, TGT, WMT, and KSS announced hiring plans for the Holiday selling season over the past week and everyone with the exception of KSS announced flat to down seasonal hiring plans. That makes sense given that employees are now at the $9.00 minimum wage hurdle.
We think this year's Holiday period will be extremely competitive. And not for the typical reasons like promotions. Our analysis suggests that KSS is most at risk to the wage pressure dynamics due to its low pay for entry level positions relative to competitors (according to GlassDoor it paid 4% and 8% below TGT and WMT, before the announced wage increases). Consider the following...
1) The current unemployment rate at 5.1% is down 100bps from the same time last year. At the same time two of the three biggest employers in the sector (WMT & TGT) took up the minimum starting salary to $9.00 and more have followed suit. To us that means that a) demand is higher for a more scarce resource and b) the price to acquire those employees just got more expensive. Neither is a positive for SG&A.
2) We’ve already heard that UPS and FDX are having trouble staffing for the Holiday surge. That will make it more difficult for retailers to stock online fulfillment centers (or at least more expensive). WMT and TGT may be safe because the base rate is 20% and 40% higher respectively already. But for KSS and M who are preparing for the holiday surge it will cause some headaches that we don't think have been addressed yet.
3) The other big issue is ‘free shipping’. Target went ‘free shipping’ last holiday, and earlier this year cut its free shipping threshold in half to $25. We suspect that it will go Free again this holiday, and we would not be surprised in the least to see several other retailers use this as an offensive weapon. Unfortunately, for almost everybody except the bullet-proof content-owners of the world (i.e. Nike) such a move will be dilutive to margins. Even worse news is that if they don’t play ball, then there’s risk to the top line (i.e. if either KSS or JCP opts-in to the free-shipping game, they both lose). We still think that by the end of FY16, all of retail will be 100% Free Shipping, 100% of the Time.
M - Macy's plans to hire 85,000 employees for holiday season, down from 86,000 last year. 12,000 of the employees will be for DTC fulfillment centers.
M - Macy's unveils millennial floor in Herald square store called One Below. The floor "blends technology with fashion and food" and is meant to attract the millennial customer, a goal of Macy's since 2012.
Reuters reporting that Petco is exploring a merger with PetSmart. Petco filed for IPO last month looking for a valuation of $5bn-$6bn.
HD - Home Depot opening a third e-commerce fulfillment center, located in Troy, Ohio. Center will employ 500 workers.
Ikea is building a new Seattle store of 406,000 sqft to replace the current 398,000 sqft store built in 1979. New Store to open spring 2017.
New balance opened up its new 250,000 sqft headquarters in Boston Landing development, with last group of its total 708 employees moving in last week. New Balance outgrew its old HQ, which was about 100 yards away.
TGT - Target CEO Brian Cornell is joining Board of Yum