Widlitz: The Grinch is Coming to a Store Near You
There are now fewer than 200 days until Christmas.
And while Tyler Mathisen joked Tuesday during the Christmas retail segment on CNBCthat he had already started his shopping, in the world of retail, Holiday is in full swing.
Even though most consumers are just starting to work on their summer tan, retailers are already plotting how they will convince you come Black Friday that you can’t live without that must-have sweater, over-priced pair of boots or flat screen TV. With rising input costs, food inflation and continued heavy prices at the pump my prediction is The Grinch and Heat Miser will wipe the floor with the Snow Miser.
Why so glum so early on? Now that retailers are suffering from sticker shock as they are purchasing H2 inventory we know just how bad it may be. When Gap reported Q1 they hit us with the bad news that inventory for H2 will cost them as much as 20% more than last year. With recent disappointing May sales and a focus on basics, passing on price increase to consumers seems a hard sell. Gap is in good company as we have heard from a laundry list of retailers warning about input costs. With generally uninspiring retail sales in May we are still a bit confused how storewide or select price increases will not be met with a no thank you from the consumer.
The high-end is certainly not immune either. Ralph Lauren held prices for Spring / Summer product and gross margin paid the price (and so did the stock price) RL has made price adjustments for Fall product but will not attempt to pass on the entire cost increase. As Fall product hits the stores we will see how the high-end consumer reacts.
Now for the good news…Some retailers may actually be beneficiaries of this unfriendly environment. As retailers face double digit cost increases for H2 many are ordering less units of inventory. That gives off- price retailers ( and ) a leg up in negotiating with manufacturers.
There are also retailers that offer differentiated product and as a result can pass on costs. Macy’s is hitting it right on the product front as well as the execution front. That is probably why the company described the obsession with rising input costs as “overstated” on their Q1 call. The reality is based on recent sales performance Macy’s should be feeling confident. Another stock to watch is Limited. Newness, which is helping drive sales and a product mix that is 60% NOT exposed to cotton is a solid combination. We would take advantage of recent weakness.
And don’t forget the dollar stores. This group has the grocers shaking in their boots as the exposure to consumables (and market share) increases. Dollar General plans to hold the line on prices in order to gain share. Not great news for Wal-Mart and the grocers. Dollar Tree comps recently beat expectations and the company mentioned they are pretty happy with their recent buying trip to Asia and even suggested mark ups will be moving in the right direction for Spring.
Now that is something you don’t hear too much of these days.
Stacey Widlitz is an independent retail analyst and consultant. She has worked at UBS, SG Cowen, Fulcrum Partners and in 2005 was one of three analysts to launch the Research Department at Pali Capital, where she covered Retail and Home Video for 5 years