• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

  • It's Here


    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

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


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
Merch Mgn
GP $
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
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
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


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


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.


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.


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


GME - 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