It's understandable that Macy's stock is getting hit hard, down roughly 13 percent on its poor guidance, but a lot of traders are scratching their heads over the big declines in luxury names: Kate Spade, Ralph Lauren, Fossil, Michael Kors, and Coach all down 4 to 5 percent.
The simple answer is, they all sell to Macy's and other big-box retailers, and Macy's isn't the only problem.
Macy's keeps its margins up by pushing back on the vendors they buy from—they say, "We can't sell your stuff, we want a discount on the stuff we bought from you." And that's what happens: the vendors have to take a hit on the money they are going to get.
There's a double whammy: not only does Macy's get a discount on the stuff they already have, they also adjust future orders lower.
The key numbers to look at for Macy's is the spread between inventories and sales. It's getting wider, and that's not good.
It was good a year ago, but it's been deteriorating since then:
Q4 2014: Inventory down 1%, Sales up 2% (good!)
Q1: Inventory up 2.7% Sales down 0.7% (bad)
Q2: Inventory up 3.8% Sales down 2.6% (getting worse!)
Q3: Inventory up 4.6% Sales down 5% (yikes! panic!)
So now we hit Q4, and guess what's going to happen? Macy's has a huge pile of inventory it has to clear.
That's why CEO Terry Lundgren came on CNBC Wednesday morning and said, "Consumers are going to have a field day," because of the markdowns they will have to take.
And they are not alone. We may get equally bad news from Kohl's, reporting tomorrow. Sales have been sluggish as well, and inventories are also rising. They have other issues: they are losing share to JC Penney, they have no strong internet presence, and not much in the way of aspirational brands.
We all know, of course, that the consumer is not completely falling apart. They are buying stuff, they are just not buying Macy's stuff, or other retailers. They're buying homes, cars, travel and experiences (theme parks, plays, movies, sporting events), and electronic goods.
And much of what they are buying, they are buying online. Two years ago, David Berman of Durban Capital introduced the concept of "SAA" (Samsung, Apple and Amazon), that consumers are spending on devices and using those devices to buy rather than go to the mall.
It's a concept that has clearly caught on. He was on our air yesterday and noted that inventories were indeed building at traditional retailers and that internet shopping was accelerating. He noted that traditional retail sales were up about 3.1 percent in Q3, while sales of Samsung, Apple, and Amazon were up 20.8%, with total sales up about 5.2 percent. In other words, much of the incremental growth is coming from online.
"There is a complete structural change in retail," Berman noted. Another point: because people are spending less time in malls, there is less impulse buying, which was a major help to retailers.
It's not all bad news. Fast retailers like H&M, Zara's, and Forever 21 are taking market share away from the old-school retailers.
Still, Berman was not optimistic on most of the names he covers: "Earnings are going to come down more than people expect."