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November 24, 2015

Retail Inventories Are High As Holiday Season Arrives

by Jharonne Martis.

The holiday season is upon us, and retailers have loads of inventory. While the labor market has been improving, shoppers are being selective and cautious. Let’s see who will be the winners and losers and what traditional retailers could learn from their fast fashion counterparts about managing inventory.

Overall, Q4 retail earnings are expected to grow 5.3% over Q4 2015. The Internet & catalog sector is expected to far outpace the crowd, with an anticipated whopping 55.4% growth rate. The personal products sector has the weakest anticipated growth, compared to Q4 2014 (Exhibit 1).

Exhibit 1: Q4 2015 Earnings Growth: Retail Industries

Source: Thomson Reuters I/B/E/S

Source: I/B/E/S data

Amazon poised to soar

Of Internet retailers, Amazon has the biggest earnings growth rate in the group at 257.9%, followed by Expedia at 28.0%.

It’s another story in the personal products sector – all five retailers in this area are expected to see earnings decreases compared to Q4 2014, led by Edgewell (-66.5%) and Avon (-60.0%).

Online sales will be strong and technology gadgets will be key. According to analysts polled by Thomson Reuters, Fitbits will be a big seller. Retailers know they have to offer the shopper a seamless shopping experience, with instant results, so they are continuing to invest in omni-channel selling. Consumers on cell phones and social media are getting coupons and discount codes through platforms such as Twitter and Instagram.

Amazon is poised to see earnings and revenue growth over the next four quarters. Analysts polled by Thomson Reuters agree that Amazon is crushing and stealing market share from other traditional retailers. The company has a Q4 EPS estimate of $1.61 for the current quarter, but a five-star analyst with a very accurate rating believes the company could surprise on the up side, and its EPS could be as high as $1.79.

Exhibit 2: Amazon’s Earnings and Revenue Growth Projections: Next Four Quarters

Source: Thomson Reuters I/B/E/S

Source: I/B/E/S data

The value question

According to StarMine, the stock price seems expensive. However, it has high scores among the StarMine ARM and Price Momentum models, suggesting that analysts polled by Thomson Reuters are revising earnings/revenue estimates upward. It also has positive stock price momentum in its favor. So maybe it’s a bullish signal, especially since it’s backed by good Earnings Quality.

Exhibit 3: Amazon StarMine Models

Source: Thomson Reuters Eikon/ StarMine

Source: Eikon/ StarMine

Holiday same store sales

The outlook is modest at best – we are looking at 1.4% SSS growth in Q4 2015 (vs. 2.8% in Q4 2014). The jewelry, home improvement and beauty supplies sectors are expected to perform better than last year. However, department stores saw weak traffic in the third quarter and have the weakest Q4 SSS estimate at -1.0%.

Kate Spade and Urban Outfitters’ Free People division have the strongest SSS estimates, followed by Ulta Salon — 11.0%, 10.0% and 7.9%, respectively. Athleisure continues to be a popular fashion trend, and analysts polled by Thomson Reuters favor Lululemon this holiday season with its on-trend merchandise and growing popularity. American Eagle’s Aerie is a teen favorite and is expected to see a 6.4% growth. Jewelry is always a favorite holiday gift and Tiffany’s is expected to benefit.

Exhibit 4:

Source: Thomson Reuters I/B/E/S

Source: I/B/E/S data

 

Weakest same store sales

Department stores have high levels of inventory. As a result, Macy’s and Sears have weak Q4 SSS estimates in our retail universe at -2.2%, and -4.0%. Bebe Stores has the weakest SSS estimate at -9.0%, followed by Vera Bradley — their merchandise hasn’t resonated well with shoppers. Coach and Michael Kors are losing some market share to Kate Spade. However, estimates suggest that Coach could be recuperating and come out of this negative streak starting in 2016. Meanwhile, Michael Kors continues to face difficult growth comparisons. Zumiez, Aeropostale and Gap continue to face weak mall traffic.

Exhibit 5: Q4 2015 Weakest Same Store Sales

Source: Thomson Reuters I/B/E/S

Source: I/B/E/S data

High inventory levels

Inventory is piling up, which suggests that heavy discounts might be necessary to move the products. Macy’s said in its earnings call last week that “inventory at the end of the third quarter was up 4.6% and on a comp basis.” (Source: Macy’s Earnings Call, 11/11/15).

Brick-and-mortar retailers have been losing market share to online giants and fast fashion retailers over the past few years. One strategy they use is to allow shoppers to pre-order items online. This allows retailers to manage inventory levels better, test trends before launching a new collection, deliver the item when ready and forecast revenue better. Often, when a popular item sells out on Forever 21, the customer can sign up for a notification when the item is back in stock.

Designers are taking note. During the past New York Fashion Week, according to Reuters, Misha Nonoo asked, why wait for an entire collection to come out the following season? Instead, she had the first Instagram Fashion Week show, allowing shoppers to pre-order the collection. This gave her a better gauge of how many pieces to manufacture before the items are released the following season.

Holiday trends

We see these additional major trends emerging:

  • More mobile shopping: Wal-Mart said in its press release that “Nearly 75 percent of traffic to Walmart.com is expected to come from a mobile device this holiday season” (Source: Walmart Unveils Holiday Strategy: Easier Shopping Every Day, 10/29/15).
  • The much-anticipated Star Wars movie is driving strong demand for movie-related merchandise and accessories.
  • Free shipping deals.
  • Store openings on Thanksgiving day.
  • Continued use of promotional pricing and deals. Since the recession, the consumer is now programmed to purchase based on promotions and discounts.
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