Retail Performance Shows Signs of Life – or Does It?
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At first glance, January comps show signs of life. Specialty stores are up nearly 8%, and Department Stores gained 2.4%. Even on the heels of one of the snowiest Januarys in a decade, shoppers opened their wallets. Consumers are back. Or are they?
Let's dig deeper into the facts.
First, January accounts for a very low portion of the first quarter's sales, frequently accounting for only 15–20% of the sales for the quarter. In addition, most of January sales typically fall in early January whenweather was not as challenging and at a time when online shopping is prevalent.
Second, January is a clearance month and it is not a good predictor of times ahead. While inventories were conservative in January, sales were driven by staggering discounts. Comp store sales are only half of the story. We are in for a dose of reality when earnings reports arrive. Third, we recently predicted that 2011 will be a highly turbulent year. We are beginning to see initial signs of this in the teen apparel sector. Specialty stores are showing wild swings. We now have three more stores who will abort monthly same store sales reporting – Aeropostale, American Eagle, and Abercrombie & Fitch. We expect others to follow suit. With the turbulence ahead, who wants to face realities every 30 days?
Last, and most important, we are heading into a major headwind of cost increases. We have just launched a study entitled AlixPartners Retail COGS Index to study the impact of rising costs on retail, and initial results are beginning to surface. Early indications show:
- On average, retailers are facing a cost increase of 19% from suppliers.
- On average, retailers plan to pass along over 50% of these increases to the consumer.
Is this really feasible? Can retailers really accommodate such a significant compression in margins this year? We don't think so.
To that end, many are working aggressively to stave off the rising costs using nine different levers. Initial indications show interesting results. The chart below shows the level of success our survey participants are realizing using each of these levers.
To participate in this survey, and receive a free benchmarking report for your company, click on the link below.
-Need to add link - AlixPartners Retail Index - COGS
In our interactions with retail executives, we see continued concern that the consumer is settling back into a 'reality check' after some holiday exuberance in spending, and is expressing unwillingness to spend on discretionary items. Unemployment remains in the 9% range—and it's nearly double that if you count 'underemployed' and 'discouraged' workers. In this environment, consumers continue to want value and are likely to be quick to identify and reject those retailers that try to take more money from their pinched pocketbooks. Going forward, we expect winning retailers to be those who offer innovative products, focus on speed to market and carefully manage operations to offset cost increases.
-Need File to Link To -As always, our data pack of retailer and macroeconomic data is attached. Follow this link to download the AlixPartners Comp Sales Report for January 2011.
For comments and additional information, please reply to retail@alixpartners.com
This article was prepared by AlixPartners, LLP ("AlixPartners") for general information and distribution on a strictly non-reliance basis. The information contained in this e-mail is also subject to the terms, limitations and assumptions contained in the AlixPartners Monthly Retail & Economic Update / January 2011 Reported Sales & Quarterly Earnings, a copy of which is attached hereto, including those assumptions, disclaimers, and other limitations contained on page 2 of that report.
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