The Big Short: A View on Retail in 2011

Includes: ANN, CHS, NKE, ROST, VFC
by: Retail Geeks

How many times over the past few weeks of retail earnings season did we hear that retail management teams have ZERO idea how consumers will respond to higher prices? There is not one person who claims to know how this year is going to play out and that what makes this year so interesting.

It’s amazing to think that for an industry that has not experienced sourcing cost inflation in 30 years, most retailers expect to raise prices and report at least flat merchandise margins in FY 2011 (see Q4 earnings conference calls).

Why not more Nike (NYSE:NKE) scenarios (see last week’s conference call that suggests material GPM percent declines this year) or VF Corp. (NYSE:VFC) scenarios (modest GPM percent downside this year) versus the flattish view most companies are espousing today? Ross (NASDAQ:ROST) management was very honest last week in suggesting predictability of merchandise margins this year is akin to throwing darts as there are few retail executives that have operated in this environment.

Finally, beware the irrationally exuberant management teams that have suggested GPM percent could rise in FY 2011 (e.g. AnnTaylor (NYSE:ANN) or Chico's FAS (NYSE:CHS)). Both of these companies came up short of their Q4 2010 GPM percent guidance after three weeks of a 13-week fiscal quarter. What makes anyone believe that their 48-week crystal ball (i.e. FY 2011 guidance) is better than their 10-week crystal ball (i.e. Q4 2010 guidance)?

One thing is clear. If retail in FY 2011 looks anything like NKE, the entire sector should be shorted today.

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