As we head into the thick of retail earnings season the threat of higher input costs is still weighing on investors’ minds. Most retailers were forced to start passing through select price increases in the second quarter, and we will hear just how that went over with the consumer as earnings hit the tape. While it is early in the game, indications are so far so good.
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Woman shopping for clothing
VF Corp (which sells to Macy’s Wal-Mart and Target) kicked off retail earnings season and told us price increases were going over quite well. For example, orders for jeans were higher than expectations and that category is responsible for the majority of VF’s price increases. Turns out that consumers are willing to pay up. Jones Group reported modest price increases have gone through without a hitch.
Coach recently reported handbags over $400 continue to increase as a percent of the mix. July same store sales numbers were overwhelmingly positive with exceptions from JC Penny , Kohl’s and Gap .
Nordstrom reported its earnings last week and full price selling and designer label sales are driving gross margin. In fact, the company has not seen such strength in full price selling since 2007.
Investors also cheered results from Ralph Lauren . Once again, full price sales rule and as a result, operating margins are expected to be down less than originally planned. The bottom line is the high-end and differentiated product lead the retail charge. I continue to stick with high-end retailers or those that offer true newness and differentiation. So what about the busy week ahead?
Market gyrations aside (I am certainly not one to pick a market bottom). In my opinion, there will still be a clear line between the haves and have–nots. If your head and your stomach can take some volatility here are the names I would play over the remainder of the retail earnings season.
Abercrombie & Fitch (A&F) reports on August 17. Comps in July beat expectations. I am betting, if anyone can successfully pass on prices it will be A&F. The recently set Back-to-School Prep product looks particularly strong (think the letter sweater John Travolta wore in the final scene of Grease to impress Olivia). Teens seem to agree, especially internationally. And international is a key part of the story going forward as that is where the store growth is. It is also where higher gross margins are. While A&F is closing stores domestically this year (which will improve productivity), the company is opening five flagships in Europe.
While I was in London last week, the smell of cologne in the air led me to the Burlington Gardens Flagship store near Bond Street. After waiting in line, I entered what seemed to be cooler than a nightclub in the teen world. The store, pounding with music and complete with employee dancers hanging over the banister was so jam packed I could barely move. And teens were not coming just to have a polaroid picture taken with the models at the entrance (no, of course I didn’t). The queue to cash out was wrapped around the store. I counted 75 plus customers in line with, on average, 2 items. And let’s not forget the pricing premium internationally is pretty stiff (some items had a premium of as much as 40 percent according to my fx math). Domestically, the company is using price promotions and putting competitors to shame, gaining market share.
Limited also reports on August 17th. Newness (launches, fragrances and packaging) and full pricing continue to drive same store sales upside. Margins were actually up in July, as a result. The dividend yield above 2 percent is also attractive. Another great example of a value play.
TJX Companies and Ross Stores also report this week. Both beat July same store sales estimates and raised guidance. Let’s face it some retailers are pulling back on orders and/or will pull back on orders going into the holiday season and next year. Translation: these two retailers are left with great product at optimal pricing. The consumer will also continue to seek out better value for higher-end brands. In TJX’s case the international turnaround story is gaining traction. Looking at the UK retail environment, product should be flowing as healthy if not more than the United States. Both also offer dividend yields of between 1-2 percent.
Beyond next week Tiffany and Lululemon also offer buying opportunities. Tiffany reports on August 26th. Tiffany reported high double digit same store sales last quarter, squashing expectations. To add to it, comparisons ease going forward. Price increases have gone through without a hitch as Tiffany consumers are aware of precious metal price increases. I expect that will continue. Tiffany is also becoming increasingly diversified with 51 percent of sales coming from the Americas. And when it comes to China, Tiffany is doing it the right way: a conservative roll-out schedule and short-term leases. After all, as we recently talked about in our China CNBC blog, the consumer as well as the “in” places to have a store, are fickle.
When it comes to Lululemon this company has a problem no other retailer does - a lack of inventory. That problem will be solved in the second-half. We expect comps and full price selling to lead earnings upside. And yes, the high-end customer is not immune to the market roller coaster but store expansion opportunities and loyalty to the product should make Lululemon an outlier.
I am not suggesting that any of these buy picks will buck the market trend, if the trend is what we experienced in 2008. After all, as a reminder, Tiffany hit the $20 range from the $50 range when the world “came to an end”. But if you had the confidence in the U.S. consumer you would have been well rewarded as the stock hit a high of $85 in early July. If you have the liquidity available there are many names ripe for the picking.
Disclosure: Widlitz has personal holdings in Lululemon Athletica.
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