The Guest Blog

Reality Check after Retail Stocks Climb

Stacey Widlitz |Retail Consultant and Independent Analyst

ADP numbers and better-than-expected June retail sales across the board put a smile back on retail investors’ faces today. So is it time to break out the champagne?

A shopper walks past a sale sign at 5 7 9 clothing store at Randhurst Shopping Center  in Mount Prospect, Illinois.
Tim Boyle | Getty Images

Sure gas prices have come down over the past six weeks, and the consumer seemed to wake up a bit in June after a disappointing May.

The weather also finally broke and inspired consumers to maybe seek out that new pair of shorts.

Reality check. I would still pick my spots very carefully, especially after today’s rally that saw the S&P Retail Index hit fresh new highs. In addition, yes, gas prices may be providing some relief, but food inflation has swooped in and made sure to offset that relief.

To be sure, Costco told the Street today that food inflation is now mid single digits. The consumer just can’t catch a break.

Today’s retail numbers were strong across the board. In fact, every retailer reporting monthly sales beat expectations (JC Penney however, was left on the sidelines with a guide down).

So what is going on here? Yes, low expectations and weather helped. June is also a clearance month as retailers try to get inventory in good shape for Back to School. In some cases, the consumer was probably driven in by great deals, especially in the teen space (that group did not report today but watch out for margin pressure).

While promotions probably spurred some mall traffic overall, from the retailers reporting today, we did not get any warnings on margins like we have over the past couple of months. That is not to say we won’t have any margin warnings coming our way as retail earnings season kicks off in August.

For now I am sticking to my three-bucket approach.

Bucket one: own retailers that have differentiated product and therefore have the ability to pass on H2 (second of of the year) price increases due to input pressures.

If the consumer doesn’t see it as a must-have, price increases might scare them out the door. This camp includes Limited. The retailer blew away expectations today by three fold. Why? Newness, which leads to full price sales, less clearance and clean inventory as we head into fall. Check. Lower exposure to cotton also doesn’t hurt.

Macy’s is also in this bucket and continues to be one of the few at the mid-consumer spectrum that is differentiated. That is why comps continue to show upside versus the mass of mid-tier players who will have a hard time selling basics (and at new premium prices to go along).

Of course, the luxury players, most at 52-week highs, are also in this “stick-with” bucket. That includes Tiffany, Coach and Lululemon Athletica. Lulu is a great example of this category. Despite premium pricing, the company can’t even keep stock on their shelves. As the company is more inventory heavy for H2 comps should follow.

As for Ralph Lauren and Abercrombie & Fitch, in my opinion, the jury is still out. Will RL be able to pass on price increases? They have already said not enough to offset rising costs. Finally, Abercrombie has been using a new promotional stance to get things moving since 2010. Any change in direction domestically may be hit with some resistance. We will see.

Those retailers stuck in the middle lacking differentiation. Good luck passing on prices in H2. After today’s numbers some might be tempted. I am staying clear of the middle ground for now. That includes Gap, Kohl’s, Aeropostale, JC Penney.

While GPS and KSS put up surprisingly good numbers today, one month does not make a trend in my mind. The teen space also seems to be suffering from sameness. Therefore, the promotional battle may continue.

Those who benefit from others woes. That would be TJX and Ross Stores. Both beat today and both guided up. The reason? If the retailers around you are not feeling confident and reducing orders (or simply reducing inventory because prices are going up) you sit back and reap the rewards by getting plentiful last minute product at great deals.

Also, let’s face it—what consumer isn’t looking for great value at the moment? These two offer it. While I prefer Ross Stores, TJX does seem to be turning around the European business. Not surprising talk about plentiful product deals have you seen the early aggressive sales in the UK recently?

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