Retail Callouts (12/30): Online Returns, Hong Kong Tourism, KATE, KSS, TGT, M, JCP, JWN

Takeaway: Online returns, another cost for retailers to absorb. Hong Kong traffic slows, little KATE exposure.

KSS, TGT, M, JCP, JWN - Online spending up, returns up = another cost for retailers to absorb

(http://www.bloomberg.com/news/articles/2015-12-29/online-surge-leads-to-many-not-so-happy-returns-for-retailers)

 

Merchandise returns are expected to increase 8% to $62bil over the months of November and December, and that makes sense. As online spending takes a bigger chunk of the spending pie, returns should follow in step.

With 80% of retailers offering free shipping on returns, that's a tough price tag to swallow for a lot of companies in this space -- especially those with a small average basket. We think that both sides of the fulfillment equation, shipping and returns, for things like apparel/footwear/home décor are headed to 100% free 100% of the time by the end of FY16. That started this holiday as retailers used 'free shipping' promotions as an offensive weapon (TGT, KSS, WSM, etc). Unfortunately, for almost everybody except the bullet-proof content-owners of the world (i.e. Nike), such a move will be dilutive to margins to the tune of bps. Even worse news is that if they don’t play ball, there’s risk to the top line (i.e. if either KSS or JCP opts in to the free shipping game, they both lose).

 

Of course, if free shipping is offset by more full-price selling, then this would be a saving grace. Unfortunately, we have yet to see any sign of this.  It could also be made up of more impulse purchases in the online format -- but with the exception of Amazon (the King of the impulse purchase), we've actually seen units per transaction go down for most retailers online.

 

Here is how the margin math works for 4 retailers at various ends of the department store spectrum. JWN gets up to a 1500bps higher gross margin than KSS on a straight on-line sale, 1300bps in the case of a partial return, and a both sit at a -10% margin on a full return. High end, high ticket, and solid content retailers can play online. Otherwise, it's an extremely dilutive channel with even more cost pressure as the free shipping and return threshold move towards $0.

Machine generated alternative text: KSS TGT TGTw/RC M JWN
Normal Sale
Basket
Merch Mgn
GP $
Shipping
Adjusted Margin
$75.00 $125.00 $176.50 $200.00 $300.00
35% 38% 33% 40% 45%
$26.25 $47.50 $58.25 $80.00 $135.00
$7.50 $10.00 $10.00 $13.00 $16.00
$18.75 $37.50 $48.25 $67.00 $119.00
Margin %
25.0% 30.0% 27.3% 33.5% 39.7%
Partial Return
Return
Shipping
Reversed Profit
Adjusted Margin
$37.50 $62.50 $88.25 $100.00 $150.00
$0.00 $0.00 $10.00 $13.00 $16.00
$13.13 $23.75 $29.12 $40.00 $67.50
$5.63 $13.75 $9.12 $14.00 $35.50
Margin %
15.0% 22.0% 10.3% 14.0% 23.7%
Full Return
Full Return
Shipping
Merch Profit
Adjusted Margin
$75.00 $125.00 $176.50 $200.00 $300.00
$7.50 $10.00 $20.00 $26.00 $32.00
$0.00 $0.00 $0.00 $0.00 $0.00
-$7.50 -$10.00 -$20.00 -$26.00 -$32.00
Margin %
-10.0% -8.0% -11.3% -13.0% -10.7%

Retail Callouts (12/30): Online Returns, Hong Kong Tourism, KATE, KSS, TGT, M, JCP, JWN - 12 30 2015 Ecomm Math

 

KATE - Hong Kong traffic slows, KATE little exposure

(http://www.wsj.com/articles/hong-kong-retail-slows-as-mainland-tourists-stay-away-1451368824)

 

These Hong Kong tourism numbers are just flat out bad. But as it relates to KATE, the company limited its exposure to the region when it converted its 8 doors into a JV earlier this year. Not that the company was overly exposed to the region in the first place -- at most Hong Kong was a $20mm business for KATE (the combination of Hong Kong, Macau, and Taiwan = $34mm in 2014).

To put it into context, KATE has just 3.5% of the handbag and accessories market compared to COH at 12.5% and KORS at 9%. And the company is just in the beginning stages of growing its global footprint, expanding into new categories (mostly through licenses), and converting its share of voice into a higher share of wallet. Macro matters, but we think there are enough growth vehicles and market share opportunities for KATE to continue to drive the topline, which it has proven it is capable of doing despite serious concerns over the ‘space’.

Retail Callouts (12/30): Online Returns, Hong Kong Tourism, KATE, KSS, TGT, M, JCP, JWN - 12 30 2015 kate chart

 

Etsy Acknowledges Photo Bug on Mobile App

(http://www.ecommercebytes.com/cab/abn/y15/m12/i30/s02)

 

BBY - Fraudulent holiday returns hurt retailers

Retailers estimate that 3.5 percent of their holiday returns this year will be fraudulent, up slightly from the estimated 3 percent reported last year, according to the NRF.

(http://www.daytondailynews.com/news/news/fraudulent-holiday-returns-hurt-retailers/nps3K/)

 

FDX, UPS - Study: FedEx beats UPS in on-time deliveries

FedEx met holiday delivery guarantees 97.8% of the time in 2015, an improvement from 97.3% in 2014 and 95.4% in 2013.

UPS came in at a 95.5% success rate this year down from 98.1% in 2014 but was better than 93.9% in 2013.

(http://www.chainstoreage.com/article/study-fedex-beats-ups-time-deliveries)

 

ADS - Adidas CFO says investors are not pushing for Reebok sale, Taylormade decision expected in Q1

(http://www.ft.com/intl/cms/s/0/bd36d46e-a807-11e5-9700-2b669a5aeb83.html#axzz3veD8zu1A)

 

GME - GameStop Says We're No RadioShack as Investors' Doubts Increase

(http://www.bloomberg.com/news/articles/2015-12-30/gamestop-says-we-re-no-radioshack-as-investors-doubts-increase)

 

AMZN -  Amazon has been operating secret flights carrying thousands of packages in and out of the UK for the past six weeks as it trials setting up its own air freight business

(http://www.standard.co.uk/business/amazon-in-secret-move-to-launch-own-european-air-freight-service-a3143936.html)


Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more