February Shows Promise - Enjoy It While It Lasts

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The strong February comp store results reported this month show continued consumer desire to increase shopping spend. Higher-end retailers and value players have thrived during the past few months, while whose stuck in the middle continue to trudge along. Growing consumer confidence and an economy showing more positive signs have given retailers hope that top-line gains might help offset the headwinds we face in rising cost of goods.

Unfortunately, the recent signs of positive comps came during the months that are the most insignificant for most retailers. Headwinds are growing stronger, so enjoy the strength in sales while it lasts.

Unfortunately, the turbulence AlixPartners predicted earlier this year has appeared in dramatic fashion in the last weeks of February. Gasoline prices rose by the second largest amount ever in the last week of February. Only the post-Katrina week of Aug. 30, 2005 had a larger increase. Gasoline prices have now risen 72.6 cents in the past year. This rapid increase should be a major concern to retailers.

Lower-income households are already facing the need to significantly reduce their spending. As gas prices continue to rise, the impact will extend into middle- and upper-middle-income households. Upper-income households may be able to absorb the increase more easily than lower- and middle-income households.

This spike in gasoline prices will be disruptive as periods of increasing fuel prices are associated with lower retail sales growth.

Source: US Bureau of Labor Statistics, US Census Bureau, AlixPartners analysis

The first headwind will likely hit in April and May. Retail sales declines typically lag gas price increases by about two months as consumers begin to tighten their wallets as they feel the pressure of higher monthly gas expenses.

The winds could get stronger as we enter the fall. Our recent Retail COGS study shows that the rising costs from Asia are higher than many expected, with the main impact hitting product that hits the selling floor in July and August. The average retailer expects to pass on about 50% of the cost increases to consumers.

Good luck. At this rate, by the time we enter the back-to-school season, we could have a cash-strapped consumer, who is highly sensitized to promotions, shopping in stores where retailers are attempting to pass on price increases.

We can't predict the future, but we can work to prepare for it. Retailers need to act now to develop forecast scenarios that reflect lower sales and identify actions to respond quickly if the recent gasoline price increases turn into a longer-lasting trend.

-Need Full Comp Data- As always, our data pack of retailer and macroeconomic data is attached. Follow this link to download the AlixPartners Comp Sales Report for Feburary 2011.

For comments and additional information, please reply to retail@alixpartners.com

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