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

Retailers the next leg to fall

Low-to-Mid end stores are reporting more cautious customers, spending on necessities such as food and gasoline and not the others.

From Reuters,

In general, retail earnings looked all right in the quarter ended around April 30, said Kurt Salmon retail strategist John Long, but shoppers were largely absorbing higher costs just on food and gasoline and had yet to face looming increases other goods.

"We're already starting to see a little bit of margin pressure," Long said. "And we think that as we get into the summer and fall, when we see bigger price increases ... that may cause some consumers to pull back."

............................At BJ's, the No. 3 U.S. warehouse club chain, shoppers traded down in both brands and package sizes, Chief Financial Officer Bob Eddy said during a conference call.


............................The U.S. recovery will continue to be slow and uneven, particularly for more moderate-income households, Target (TGT) Chief Executive Gregg Steinhafel said during a conference call.


.............................Wal-Mart Stores Inc (WMT) said its customers were showing pronounced signs of living paycheck-to-paycheck, as sales at its U.S. discount stores open at least a year had fallen for two straight years.

In my opinion, as long as gasoline prices stay close to $4 at the pump, this is going to be a slow and long summer and even fall for many retailers, especially those with very little margin to squeeze such as discounters, supermarkets, low-end department stores as they start to pass on cost increases to customers in the next few months.


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 have positions in the above stocks in her personal account as of May 18, 2011

Housing starts do not indicate a recovery

From Wall Street Journal

The annualized pace of housing starts posted 0.523 million units below the median market forecast for 0.570 million units and is down 23.9 percent on a year-ago basis. ......................................................................

By region, the drop in starts in was led by a monthly 23.0 percent plunge in the South with the Northeast declining 4.8 percent. However, gains were seen in the Midwest and West, up 15.7 percent and 3.7 percent, respectively.

Housing permits have been volatile in recent months but trending flat. Housing permits declined 4.0 percent in April, following a 7.5 percent surge the month before. Overall permits came in at an annualized rate of 0.551 million units and are down 12.8 percent on a year-ago basis.

The bottom line is that housing is flat and at anemic levels.