Apparel Retailers Change Pricing And Wall Street Rewards It

A customer visits Macy’s flagship store in New York on May 20, 2021.

Eduardo Muñoz | Reuters

A series of major retail earnings this week highlighted a sharp industry gap between retailers trying to keep prices low for customers in the face of rising inflation, and those who could pass costs on to shoppers this holiday season.

Major chains Target and Walmart were punished by investors after filing third-quarter income statements, despite the results exceeding analysts’ expectations. Both have adopted a strategy that largely entails some of the rising costs of shipping, labor and materials, rather than higher prices. Both businesses indicated the need to maintain a valuable reputation.

“This is our goal,” Walmart CEO Doug McMillon told CNBC’s Squawk on the Street. “We save people money and help them live better lives. These words came from [Walmart founder] Sam Walton’s mouth. He loved to fight inflation. And so do we. “

Walmart shares fell 2.6% on Tuesday after the results were released. On the day the report was released, Target shares fell 4.7% on Wednesday. Walmart shares are now slightly down from the start of the year, while Target is sticking to gains of around 43%.

But if you’re in the business of selling a lot of clothing, that’s a different story altogether. Shares in department store operators Macy’s and Kohl’s, owner of TJ Maxx TJX and Victoria’s Secret lingerie retailer have surged as companies advertised their pricing on Wall Street and reported leaner inventory.

Macy’s shares jumped 21% on Thursday, at one point reaching a three-year high of $ 37.95. Kohl’s shares are up more than 10%, while Victoria’s Secret shares are up nearly 15%. TJX shares hit a 52-week high of $ 76.94 on Wednesday.

“Everyone was concerned about the supply chain and inflation,” said Simeon Siegel, analyst at BMO Capital Markets. “But that’s literally the same as stock shortages and higher prices.”

“Each of these spikes in stock prices represent a recalibration from fears of inflation to hype about low discounts,” Siegel said.

Macy’s says it gives and takes

All retailers navigate an environment where prices for everything from fuel to labor are rising. Inflation reached a three-year high in October. The Consumer Price Index, which includes a range of products ranging from gasoline and health care to groceries and rent, rose 6.2% year on year, the highest since December 1990.

However, some categories have seen more growth than others. For example, food prices rose 0.9% in October, while the cumulative rise in prices for meat, poultry, fish and eggs was 1.7%. Clothing prices have not changed.

Macy’s, which primarily sells apparel, said it has been conducting tests over the past three months to see which categories of products are more price sensitive and which buyers are willing to shell out a few more dollars on.

“We’ve clearly gone through these inflationary cycles before, and so we have a lot of experience with this,” Macy CEO Jeff Gennett said in an interview. “And with fashion, you can sometimes pass that on and you can get a higher ticket and a higher selling price.”

In some cases, however, Gennett said, Macy’s is facing “price caps” on items such as a plain T-shirt or a pair of denim jeans. “In some cases, we are holding retail and taking on higher costs and lower margins,” he said.

Another weapon Macy’s has in its arsenal is Lean Stocks, Jennett said. This means that he does not have to make a discount on surplus goods that are not for sale. Macy’s inventories for the three-month period ending October 30 were up more than 19% year-over-year, but are down more than 15% in two years.

Earlier in the week, inflated stocks at Target and Walmart were a wake-up call for investors. In part, these companies have taken the initiative to make sure shelves are well stocked for the holidays – and it could pay off if shoppers rush into stores to spend in the coming weeks. Walmart said its stocks rose 11.5% ahead of the holidays. Target’s inventories are up nearly 20%, or $ 2 billion, over last year.

“Retailers don’t want to scare the customer away,” said Navin Jaggi, president of commercial real estate consultancy JLL. “They’re willing to manage their costs and take on the selling price because they don’t want to take away the motivation to buy a product.”

But if people don’t show up, or if they show up at Target and Walmart looking for something else that isn’t in stock, that bloated inventory could be dropped in January.

Significantly, Gennett said that when Macy’s does apply markdowns, it is local, not regional. The same shirt at a Macy’s store in Los Angeles could be cheaper than five miles away, he said.

Kohl’s sees shoppers turning to premium brands

Kohl’s CEO Michelle Gass said its customers are gradually gravitating towards higher-end merchandise as the retailer changes its range. She quoted Nike and PVH-owned Tommy Hilfiger are two examples of more premium brands at Kohl’s that offer higher prices.

“We still have these great promotions, but there are fewer of them, so it’s easier – especially for our new clients,” Gass said in an interview. “We now have sophisticated elasticity tools.”

Like Macy’s, Kohl’s also tightened control over inventories, which fell 25% in two years at the end of the third quarter.

Jefferies analyst Stephanie Wissink said Kohl’s margins are improving on the back of current inventories as well as deferred demand, allowing the company to sell more products at full price.

Victoria’s Secret also sells more bras and lingerie at higher prices, thus increasing sales. Revenue in the third quarter rose 7% to $ 1.4 billion from $ 1.35 billion a year earlier. Its stocks are up 4% over last year and down 16% over 2019.

TJX CEO Ernie Herrman told analysts during a teleconference on Wednesday that the off-budget chain also saw no resistance from consumers due to rising prices.

“We thought there would be a few points here or there that we would run into problems, but that didn’t happen,” he said.

TJX’s comparable store sales for the quarter ended Oct. 30 were up 14% year-on-year, while net sales rose 24% to $ 12.5 billion. Its reserves rose slightly to $ 6.6 billion from $ 6.3 billion two years earlier.

—CNBC’s Melissa Repko contributed to this report.

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