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What Cowen Analysts See for Back-to-School, Inventory and Consumer Trends

At Cowen & Co.’s virtual New Ecosystem Summit last month, the conversation focused on retail’s reopening and how merchants are strategizing to capture pent-up demand.

Managements acknowledged stimulus, pent-up demand, and low promotional levels as tailwinds, which supported improved comps in March and April, along with robust trends in May, but are encouraged by recent trends in re-opening categories, along with continued strong demand for those which outperformed last year,” said Oliver Chen, equity retail analyst for the investment bank. 

Kohl’s, he said, could stand to win during back-to-school (BTS), which coincides with the arrival of child tax credits—giving parents a bit more wiggle room on spending. Families are slated to receive up to $3,600 for each child under 6, and up to $3,000 for each child age 6 through 17 this year. Sephora shop-in-shops launching on Aug. 1 and growing brand partnerships are also seen as an upside for the department store.

What’s more, Cowen analysts agree with the industry narrative that a “great wardrobe refresh” is coming, along with the continued rise of a new denim cycle. Kohls and American Eagle Outfitters have noted new traction in denim, Chen said. Factors like “robust restocking on pent-up demand” as well as “renewed denim cycle and Aerie momentum” make AEO Cowen’s top BTS pick, Chen said, pointing to the specialty retailer’s “strong earnings” as well. Macy’s and Nordstrom also called out momentum in dressier fashion categories now that offices are reopening and professionals are returning to workplaces, he added.

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“We think this trend should continue to improve over the coming months, and accelerate into the BTS season as kids returning to school will be the catalyst for many parents to return to the office,” Chen said. Nordstrom, which plenty of consumers view as a fashion authority and where many make their first designer splurge, is positioned to succeed during reopening, he added.

Inventory remains a hot topic, especially as several major retailers addressed their “inventory tightness” during earnings calls. Chen noted a mismatch between low stock levels and surging first-quarter sales, a pattern that he believes could spill over into next year, based on his conversations with retail executives.

To circumvent any merchandise struggles, retailers have identified several workarounds. Some are prioritizing certain purchases ahead of strategically important events while others are investing in allocation tools to optimize inventory placement for maximum sell-through, which will strengthen margins, lower promotions and cut fulfillment expenses.

“Ultimately, we think once the environment normalizes, inventory positions and markdowns will be more controlled in the future than they were prior to the pandemic,” Chen said. Preserving merchandise margins will mitigate costs rising throughout the supply chain.

These cost pressures are being felt across commodities, supply chains and labor expenses, though lower pandemic expenses are serving as an offset. Chen expects retailers to scale their automated checkout pilots, and fulfill more digital orders through stores, where 40 percent of Kohl’s online sales were completed in Q1, the analyst wrote in a research note.

“Body positivity, profits with a purpose and sustainability” consistently surfaced as top-of-mind topics in Chen’s conversations with privately held fashion companies. Lingerie brand Adore Me has been gaining share by embracing size inclusivity, while swimwear startup Summersalt, which empowers women through body positivity, has amassed a loyal following. Luxury online platform Olivela relies on a purpose beyond profit model, giving 20 percent of proceeds to various charities. Among the major mainstream players, Kohl’s is increasing its use of sustainably sourced cotton, polyester and other fabrics in private-label products.