Retailers have outperformed the S&P 500 by a wide margin since the September rally began (the exception was a brief stretch in December and January). But the Street is getting nervous.
January retail sales are out tomorrow, followed by the effective start of Q4 earnings with Abercrombie & Fitch on Wednesday.
Most retail watchers are not expecting large earnings outperformance, and most on the Street believe guidance will be cautious.
"We expect companies will likely guide even more conservatively than usual, given difficult 1Q comparisons and February's slow start with weather conditions keeping shoppers out of the malls," Morgan Stanley's Kimberly Greenberger said in a note typical of analyst and trader sentiment.
The other major issue: commmodity inflation, particularly cotton. Remember, retailers are purchasing fall product now; cotton prices have almost doubled since October, so there is little doubt retailers have had to pay substantially more for that key commodity. Expect to hear a lot about "price elasticity" and the appropriate level of inventory.
Truth is, there has not been significant cost inflation in retail for some time now, and no one has a clue how inelastic the market is. Specifically: no one know what a price increase in a $45 pair of jeans to $50 will mean for sales. Will they decrease at all? 10 percent? 20 percent? No one knows.
Still, some will be able to raise prices easier than others. Goldman Sachs noted Lululemon Athletica with a strong, growing brand, could allow increasing demand to trump cost pressures.
It could be tougher for brands where sales are not growing as strongly, like Aeropostale and Gap , they note.
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