Clothing retailers relax their pricing power and Wall Street rewards it

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

Eduardo Munoz | Reuters

A series of major retail revenues this week has revealed a sharp divide in the industry between retailers who try to keep prices low for customers amid rising inflation, and those who are able to pass costs on. buyers this holiday season.

Big-box chains Target and Walmart were punished by investors after releasing third-quarter earnings reports, despite results exceeding analysts’ expectations. Both have adopted a strategy that largely consists of absorbing some of the rising costs of shipping, labor and materials rather than increasing sticker prices. Both companies spoke of the need to maintain a reputation for value.

“That’s our goal,” Walmart CEO Doug McMillon said in an interview with CNBC’s “Squawk on the Street”. “We save people money and help them live better lives. These are the words that came out of [Walmart founder] Sam Walton’s mouth. He liked to fight inflation. U.S. too.”

Walmart shares fell 2.6% on Tuesday in the wake of its results. Target stocks fell 4.7% on Wednesday, the day they were released. Walmart stock is now down slightly since the start of the year, while Target’s retains a gain of around 43%.

But if you sell a lot of clothes, that’s another story. Shares of department store operators Macy’s and Kohl’s, TJ owner Maxx TJX and lingerie retailer Victoria’s Secret rallied as companies touted their pricing power on Wall Street and reported leaner stocks.

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

“Everyone was worried about the supply chain and inflation,” said Simeon Siegel, analyst at BMO Capital Markets. “But it’s literally the same as tight stocks and higher prices.”

“Each of these stock market pops represents this recalibration from worries about inflation to enthusiasm about low discounts,” Siegel said.

Macy’s says it’s give and take

All retailers navigate an environment where the costs of everything from fuel to labor are increasing. Inflation peaked in three decades in October. The Consumer Price Index – which includes a mix of products ranging from gasoline and health care to groceries and rents – rose 6.2% year over year, the highest since December 1990.

However, some categories experienced a greater increase than others. Food prices, for example, rose 0.9% in October, with meat, poultry, fish and eggs collectively increasing 1.7%. Clothing prices remained stable.

Macy’s, which is primarily a clothing destination, said it has conducted tests over the past three months to see which categories of goods consumers are more price sensitive and where buyers are more willing to shell out a few more dollars.

“We’ve clearly been through these inflationary cycles before, so we’ve had a lot of experience with them,” Jeff Gennette, Macy’s CEO, said in an interview. “And with fashion, sometimes you can convey that, and you can get a higher ticket and a higher sale price.”

In some cases, however, Gennette has said that Macy’s faces a “ceiling price” for basic items such as a basic t-shirt or a pair of denim jeans. “In some cases we own the retail and we take the higher costs and we take a shorter margin,” he said.

Another weapon that Macy’s has in its arsenal is lean inventory, Gennette said. This means he won’t have to discount excess products that don’t sell. Macy’s inventories in the three-month period ended Oct. 30 are up more than 19% from levels a year ago, but are down more than 15% on a two-year basis.

Earlier in the week, inflated stocks at Target and Walmart were a wake-up call to investors. In part, these companies were proactive in making sure shelves were well stocked for the holidays – and that could pay off if shoppers rush to stores in the coming weeks eager to spend. Walmart said its inventories were up 11.5% before the holiday season. Target’s stocks grew nearly 20%, or $ 2 billion, year over year.

“Retailers don’t want to scare a consumer,” said Naveen Jaggi, president of retail advisory services for commercial real estate company JLL. “They’re willing to manage their costs and pay the selling price because they don’t want to lose 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 stocked, that bloated inventory could be reduced in January.

Notably, Gennette said that when Macy’s uses markdowns, it discounts locally rather than regionally. So the same shirt in a Macy’s store in Los Angeles could be cheaper than another five miles away, he said.

Kohl’s sees shoppers eyeing premium brands

At Kohl’s, CEO Michelle Gass said her customers have gradually shifted to high-end products as the retailer changes its assortment of merchandise. she quoted Tommy Hilfiger, owned by Nike and PVH, are two examples of higher-end brands at Kohl’s that sell for higher prices.

“We still have these great promotions, but less so it’s easier, especially for our new customers,” Gass said in an interview. “We now have sophisticated elasticity tools.”

Like Macy’s, Kohl’s also tightened its grip on inventories, which were down 25% year over year at the end of the third quarter.

Jefferies analyst Stephanie Wissink said Kohl’s profit margins were improving thanks to its current inventory position as well as the pent-up demand environment, allowing the company to sell more products at a premium. .

Victoria’s Secret also sold more bras and underwear at higher prices, increasing sales. Third-quarter revenue rose 7% to $ 1.4 billion, from $ 1.35 billion a year earlier. Its inventories ended up 4% from last year, and down 16% from 2019.

TJX CEO Ernie Herrman told analysts on a earnings conference call on Wednesday that the non-price chain had also not seen a pullback from consumers on the price hike.

“We thought there would be a handful of items here or there that we would have issues with, but that wasn’t the case,” he said.

TJX’s same-store sales for the quarter ended Oct. 30 were up 14% year-over-year, while its net sales climbed 24% to $ 12.5 billion. Its inventories edged up to $ 6.6 billion from $ 6.3 billion two years earlier.

-CNBC Melissa Repko contributed to this report.

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