EXEC: Cowen provides weak holiday forecast


A report produced by Cowen, the multinational independent investment bank and financial services company operating through two business segments – broker/dealer and an investment management division, following its recent consumer survey, offered a dismal view of holiday spending as it watches trends in discretionary spending weakening and stocks reaching peak levels to lead to downward pressure.

Also compounded by increased currency risk, Cowen believes gross margin estimates are “too high” as consensus estimates assume margin expansion for 95% of Cowen’s coverage in the space over the course of the year. of exercise 23.

Cowen said he was “cautious” about third and fourth quarter guidance for Under Armour, Burlington Stores, Adidas, Allbirds, Hanesbrands, Puma, PVH, Skechers and Figs. The investment firm has reduced its price targets across its coverage.

“There are record levels of inventory across the industry with demand slowing,” Cowen noted in his report. “Consensus gross margin expectations through 2023 are too high as markdown margins rise, storage costs rise and storage costs rise in the P&L and transactional pressure on currency increases (COGS in dollars and sales in weaker currencies). Nike’s increase of 150 basis points in markdown pressure in the first quarter of the company’s fiscal year is indicative of a fragile environment.”

Cowen said his collaborative exclusive monthly survey showed that 77% of respondents in August 2022 said prices for daily shopping were up from a year ago, unchanged from July 2022 and above 60% in February 2022. The survey also showed that social media, events, travel and clothing were the top three areas where consumers plan to spend a smaller share of their wallet.

“Faced with greater macroeconomic uncertainty and a heightened promotional environment, retailers may be challenged by both consumer spending cuts and trade-offs to more affordable product lines and brands,” Cowen wrote. .

The survey showed that when consumers were asked if they planned to cut spending in response to the inflationary environment, 64% said they planned to cut in August, in line with figures from its July survey. 2022 but up from the 50% of consumers in February 2022 who said they would cut spending in response to higher costs.

When it comes to inflationary pressures, labor remains a headwind as there are two job openings per unemployed person based on data from the US Bureau of Labor Statistics, up 53% from levels in the United States. before COVID.

Cowen estimates that labor costs for stores and distribution centers represent about 8-10% of retailer sales.

SG&A pressure for stores and distribution centers (labour accounts for 8-10% of sales for retailers) remains a headwind. Federal funds rates project the terminal rate to reach around 4.6% in FY23, which in theory should increase the unemployment rate – a move to 5% unemployment would create $2 million in job losses. jobs.

Along with housing, affordability is at a 20-year low, and Cowan predicts that housing costs, 32% of the CPI, could put pressure on core inflation readings.

The other headwind on core inflation is housing/rent, with housing affordability at a 20-year low and housing costs accounting for 32% of the consumer price index (CPI), the largest component of all categories. Cowen wrote: “Although the category did not experience the rapid acceleration that has been present in other categories such as energy, housing inflation has steadily increased from 2% yoy to beginning of 2021 at current levels of 6%. Commodities, excluding food and energy and food, are the second largest components of the CPI, at 19% and 14%, respectively. »

Cowen sees downside risk to the industry’s holiday sales projections and plans.

“Holiday 2022 is shaping up to be a very different dynamic to 2021 given a host of macroeconomic pressures that may negatively impact the level of holiday consumer spending compared to previous years, as well as increased inventory levels. in the industry that have started to trigger a ramp in promotional markdowns,” Cowen noted.

Cowen forecast that assuming core CPI inflation of around 6% and an underlying “real” retail sales growth rate, excluding food and gas, of 0.5% a year on the other, nominal holidays 2022.

Cowen wrote: “With promotional activity ramping up in the 2H of 2022, Holiday 2022 is likely to reflect a return to the highly promotional cadence of years past among retailers and brands, whether physical, omnichannel or digital native. ”

Bolstering the promotional atmosphere, Amazon has added a second Prime Day for 2022, called Prime Early Access, which will run from October 11-12. Target is also hosting a holiday event October 6-8.

In further observations, Cowen wrote, “E-commerce traffic is largely moderating in the consumer ecosystem and non-binding retail. Customer acquisition and retention costs increase on search and social commerce.

“Promotions are increasing on search engines and social platforms. Cowen continues to see increased promotions on search engines and social platforms.

“During the first half of 2022, the savings rate fell to 5%, below pre-pandemic levels.

“We are still in the early stages of returning to services and discretionary goods could suffer from a slowing economy amid rising interest rates and tough consumer spending comparisons,” Cowen said.

On the positive side, Cowen noted that freight, fuel and some commodities, such as cotton, have seen “a deflationary trend as U.S. consumer demand slows, providing prospects for the development of future trade relief. margins for retail and consumer brands at some point beginning in fiscal 2023, but likely not before the second half of fiscal 2023.”

Shipping rates on containers moving from Shanghai to Los Angeles fell below $4,000 to $3,779 in the most recent week for the first time since September 17, 2020, and rates have come down about 70% from the September 16, 2021 peak, the company noted; however, the war in Ukraine, China’s COVID-19 “zero tolerance” policy, and tensions with Taiwan “are indicative of a macro and geopolitical environment that is driving one of the highest cross-volatilities in history on interest rates, foreign exchange, fixed income and equity valuations/discount rates,” Cowan said.

Cowan continued: “The sweeping changes to fiscal and monetary policy in North America and Europe will likely keep volatility high in financial markets, fueling consumer sentiment and behavior. It is difficult to see resolutions to many of these issues in the near future. »

Photo courtesy of Walmart/Getty


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