Thursday, May 19, 2011

Retailers feeling the cost pinch

Echoing the previous post, "Retailers the next leg to fall", apparel and shoe retailers continue to feel tremendous cost pressure that they find it hard to pass on to consumers. Many clothing sellers plan to raise prices this summer and fall to make up for higher costs, but there will be limits to how much shoppers will tolerate in a still challenging economy.

Gap's shares (GPS) fell $3.63, or 15.6 percent, to $19.66 in after-hour trading as the company announced a decline in EPS and revenue. Gap now expects to earn $1.40 to $1.50 per share for the year, down from its February forecast for $1.88 to $1.93 per share, citing increased costs. Before Thursday's earnings report, analysts expected $1.84 per share, according to FactSet.

The company claimed that it had to spend 20% more on each item it produced. Other retailers had generally reported 10-15% hikes in cost.
Today, the worse-than-expected results sent shares of Aeropostale (ARO) down $2.04, roughly 10 percent, to $19.32 in after-hours trading. The company cited higher costs and softer sales. This drop in shares was after dropping as much as 16% in early May as the company first warned about cost pressuring margins.

Earlier on, Timberland Co (TBL) saw its shares plunging 32% as it expected margins to shrink this year as the shoemaker battles rising product and labor costs.

As we are getting into the summer, the list of retailer sell-off list may expand as companies, especially low-to-mid end, fail to pass on higher costs to customers. The most vulnerable may be those of the low end such as DLTR, FDO, DG, WMT, COST, TGT, BIG, to name a few, although names like DLTR, FDO, DG may be helped by more thrifty buyers as the economy slows.

For those who do not like the hassles of doing research on individual companies, building short positions in retailer ETF such as XRT into the summer may offer favorable risk/reward profile.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any of the above positions in her personal account as of May 19, 2011

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