How Are Retailers Coping With Rising Costs?

Includes: ANF, LOW, M, TJX, WMT
by: RetailSails

As major retailers report 2010 results, the focus will continue to be on the surging costs of commodities and labor. As oil once again hovers above $100 per barrel and cotton prices stand at a 150-year high, retailers have tough choices as far as raising prices or passing the costs onto consumers.

Gas prices at the pump are currently running about 20% higher than last year and the highest since October 2008. With oil above $100/barrel don’t be surprised to see gas prices hit $4/gallon again by the summer. Economists estimate each 1 cent increase in gas prices takes $1 billion out of consumers’ pockets. The last thing shoppers want is to see is higher prices.

Yet retailers are contending with not just surging input costs, but much higher labor and manufacturing costs in historically cheap regions such as China. This has led companies to move production to cheaper alternatives like Vietnam and Bangladesh. Larger retailers will be able to push some of these costs onto suppliers and higher-end chains should have no problem raising prices, but discount shops will have a hard time preserving margins.

  • U.S. Consumers Feel the Pinch of Surging Oil Prices (Yahoo! Finance)
  • Apparel Retailers Must Get Creative To Combat Rising Costs (Nasdaq)
  • U.S. Consumers Brace for Higher Food and Gas Costs in 2011 and Will Manage Their Food Budgets Differently as a Result (NPD)
  • Clothing prices to rise 10 pct starting in spring: surge in raw material and labor costs is squeezing retailers and manufacturers who have run out of ways to pare expenses (Associated Press)
  • The near-zero inflation era may be ending. Prices are rising slightly, and economists expect a steady climb as the recovery gains steam (USA Today)
  • Retailers, wholesalers cope with surging prices: inflation once again is reaching into pocketbooks from grocery aisles, clothing racks, tire centers and other consumer haunt (KC Star)
  • Wegmans freezes prices on basic necessities: has pledged to not raise prices on 40 products this year, despite rising commodity and energy prices (CNN)

Below we take a look at what retail executives had to say on their Q4 conference calls:

Mike Jeffries, CEO of Abercrombie & Fitch (NYSE:ANF):

"There is no doubt that sourcing costs are the biggest headwind we face. When we last spoke in November, I mentioned that we were seeing increased costs for the late-spring-season receipts. That pressure has continued to increase. And as we sit here today, we are anticipating double-digit cost increases for the fall 2011 season.

"In response to this, we do expect to increase our tickets and our gross margin rate will also benefit from the continued growth of our International business. However, there is significant uncertainty about how these different effects will balance out in terms of their impact on our overall gross margin beyond the spring season. One thing we will continue to do is to take a long-term approach. Among other things, that means that we will not sacrifice quality to achieve cost reductions."

Karen Hoguet, CEO of Macy’s (NYSE:M):

"As we talk about our assumptions for 2011, the subject of commodity price increases is a key one. We are taking this challenge very seriously, but you need to keep this issue in perspective. As a better fashion retailer, we are less reliant on opening price point basics and have the ability to add quality features and fashion details that command a higher price point. Average unit retails in these categories will increase but into a lane in which we have successfully played prior to the recent recession. Also, remember that a significant portion of our business is in categories that are not impacted by the escalation in raw material prices.

Having said that, here are seven things that we are doing to help address this issue."

  1. While some price increases are unavoidable, we are being very careful to maintain competitive value in highly sensitive commodities.

  2. Because we are a very important customer for most of our vendors, we are able to work very closely with them to optimize our mutual pricing strategies, enabling us both to offset some of the higher input costs.

  3. We will increase the use of Search and Send to enable us to provide fringe color, size and assortment option to our customers while limiting inventory risks.

  4. We will continue to drive key item penetration and editing peripheral assortments, which will enable us to improve the cost.

  5. We have a very experienced team of executives who live and work in countries where we produce goods who are working very closely with our suppliers with whom we have very long relationships, and together, we’re dealing with the challenges that we’re both facing.

  6. We are testing and monitoring price increases this spring to understand better price elasticity on programs and individual styles within programs.

  7. We now have a pricing team in place to provide more analysis on pricing decisions.

William Simon, CEO of Walmart (NYSE:WMT) U.S.:

"Pressure from higher energy and commodity costs are factors that we’ll watch closely as they affect our own logistics and transportation costs, as well as the prices the customer pays. Rising gas prices and still-high unemployment levels weigh on the minds of our customers. These issues affect discretionary spending and figure into our assessment for guidance.

During the fourth quarter, inflation in dairy, meat and produce were somewhat offset by deflation in snacks, beverages and dry grocery. Weather issues have affected crop availability in produce and we expect to see continued inflation in fresh food categories. Labor and higher cotton prices are affecting apparel and home categories, and softlines were consolidating suppliers to improve purchasing power and leveraging our buying power with raw material suppliers. We continue to work with our suppliers to reduce inflationary pressure where possible and only pass on price increases when they cannot be avoided."

Carol Meyrowitz, CEO of TJX Companies (NYSE:TJX):

"I want to briefly mention how we see the current retail environment playing into our strengths. We all know that there’s a lot of confusion out there about pricing. Historically, disruptions in the marketplace have benefited our business by creating great off-priced opportunities.

We entered the first quarter with very liquid inventories, which affords us the flexibility to respond quickly to market trends. If the retail-pricing umbrella rises, we have an opportunity to raise our average ticket while maintaining our value gap and drive merchandise margin. If other retailers do not pass costs on to consumers, we’ve proven our ability to buy right, remain under the pricing umbrella and sustain merchandise margin. Either way, we will watch the market around us and adjust and believe that for us, the net result of the product pricing issues will be positive for us.”

Robert Niblock, CEO of Lowe’s (NYSE:LOW):

"Overall, while growth in household spending picked up late in the year, it remained constrained by high unemployment, modest income growth, lower housing wealth and tight credit. And, while consumer confidence rose in February to its highest level since February 2008, it remained close to the lows of the prior recession and near historical lows.

"According to our fourth quarter consumer survey, fewer homeowners feel the economy will get worse before it gets better. But the number of homeowners who feel the recession is not over remains high, and approximately 45% of those homeowners tell us that they do not anticipate changing their spending plans as they move into 2011, evidence that consumers at large remain cautious.”

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.