For Retailers, Will an Early Spring Bring Higher Margins?
Early signs of spring are blooming everywhere, from the tulips on New York City's Park Avenue to the cherry blossoms in Washington D.C., but beyond the blooms there could be opportunity in the retail sector.
As I write this, I am reminded of reading Annie Dillard's Pulitzer Prize winning "A Pilgrim At Tinker Creek" in my senior year of high school, where she discusses the concept of "catching spring," how suddenly it's upon you before you realize it's here.
While many are basking in the warmth, others are basking in the wealth — taking advantage of the warm weather's tradable insights.
According to Planalytics,a company that quantifies weather impacts on economic activity, more than 7,500 warm temperature records were set in March, including the warmest March on record for Chicago, Oklahoma City, Milwaukee, Detroit, Kansas City, Nashville, Indianapolis and Tampa. New York City and Philadelphia will mark March as the second warmest on record.
However, the pacific region had its coldest March since 1977, and many cities are still feeling the freeze. Portland will posting its coldest March in 41 years, including a late-month snow.
But, Planalytics says the warm, dry March in two-thirds of the country drove retail foot traffic up 5 percent for the month year-over-year, translating into strong sales in a number of product categories. Demand for lawn and garden supplies is up 39 percent in March over last year, shorts up 23 percent, even sport drinks and flea and tick medicine has seen a significant demand bump this year.
This spring's warm weather adds to momentum in some categories after a warmer-than-normal winter. Many Home Depot customers began tackling home improvement projects earlier this year resulting in double-digit same-store sales gains for as shoppers bought everything from gutters to vinyl siding, patio furniture to fencing, and exterior paint and pressure washers in the retailers' fiscal fourth quarter.
While the sales for many products were stronger than normal in March, the big question looms: are the early sales — combined with an earlier Easter — just pulling demand forward, stealing from April to give to March? Perhaps, but the purchases made are sans promotions, meaning sales were completed at higher margins, which coulde help increase both comp sales and profitability.
"An early spring equals strong full margin sales...February and March weather conditions for high margin spring sales from department stores, home centers, mass retailers and more were as good as it gets...weather wasn't just a tail wind, but a rocket assist" says Paul Walsh, vice president of weather analytics at the Weather Channel.
Planalytics CEO Fred Fox says warmer than normal weather is one reason consumers have a little extra income in their pockets. "While gasoline prices continue to rise, the fact that many consumers spent less to heat their homes this winter and are getting their tax returns back, offsets the spend on gasoline and leading to increased economic activity."
The warmer weather may be somewhat priced into retailers' stock prices, but many Wall Street analysts see continued upside due to a confluence of influencing factors from improving economic conditions to better merchandise.
BMO Capital Markets expects March's same-store sales strength will ultimately trump any negative impact on April's sales — resulting in upwards first-quarter earnings revisions.
MKM Partners is raising same-store estimates for Kohl's and first-quarter same-store sales and earnings per share estimates for off-price retailersTJX Companies and Ross Stores.
Citigroup upgraded shares of Urban Outfitters , increasing the price target to mark an eight-percent potential to pop from Monday's close. Raymond James and Wedbush Securities also increased price targets for Urban Outfitters shares.
All this means is investors can't just see warmer weather, they need to see the potential opportunities to catch some spring in their portfolios.