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Santa Will Be Good To These Three Wise Retailers

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Are you already tired of the gloom-and-doom Holiday sales forecasts? Then here’s some good news of great joy: Three purveyors of apparel  — L Brands, Michael Kors, and Ross Stores — are poised to have a very good Christmas this year.

In a presentation to an almost-packed house at F.I.T.’s Katie Murphy Amphitheater yesterday, Morgan Stanley Managing Director Kimberly Greenberger told the Retail Marketing Society that these three apparel retailers are entering the holiday season poised to grow at both the top and bottom lines. “We look to selectively buy our favorite retail stocks and prefer those with revenue upside or potential for positive margin surprises,” she said, adding that Kors, Ross and L Brands are the only ones on Morgan’s radar who meet both criteria.

L Brands, formerly called Limited Brands, leads the women’s intimate apparel pack with its Victoria’s Secret  brand and the popular-priced fragrance and beauty products space with Bath & Body Works. The company has planned numerous aggressive promotions designed to drive traffic and increase transaction size through the all-important Holiday season, when it typically earns 50%-60% of annual income. Morgan Stanley believes that the company’s superior execution will allow it to sustain its consistent same-store-sales momentum through the rest of the year.

Michael Kors Ltd., which this week released quarterly earnings that yet again topped expectations, continues to gain market share from Coach and other competitors with its “affordable jet-set luxury” positioning. The company is on track to deliver the single best holiday sales growth rate in retail. For the current quarter, Morgan’s analysts forecast a 39% total and 20% same-store sales increase for Kors.

California-based off-pricer Ross Stores is a formidable player in the channel that Morgan Stanley believes will continue to take market share from mid-tier department and apparel specialty stores. Consumers seem to prefer the off-price “better-brands-at-lower-prices” value proposition over that of their more traditional mid-tier department store rivals. In fact, Ross and its much larger competitor TJX are now the two biggest off-mall retail destinations. Due to the Ross stock price/earnings ratio discount compared to TJX, Ross is considered a better value.

On average, apparel retailers are predicted to suffer a 66-basis point deterioration in gross margin in the quarter due to slower-than-expected third quarter sales that caused a bloating of inventories. Only five apparel retailers – Ann Inc., Express, Children’s Place, Kors and Urban Outfitters – are expected to see flat or better gross margins in the fourth quarter compared to last year

Morgan Stanley has officially predicted a retail sales uptick of only 1.6% for holiday 2013, less than half last year’s 3.5% increase and the worst year-on-year gain since 2008. Weakening foot traffic and the highly promotional environment in both online and bricks-and-mortar stores are among the reasons for the dismal outlook. The shorter shopping season of 26 days compared to 32 last year will put time pressure on retailers, and could cause many to “push the panic button” on discounting earlier than necessary.

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