Pricing was the talk of 2021, and the newfound pricing power that many companies clawed back amid historic supply-chain disruption remains a top theme in the year ahead.
Off-price giant TJX could outperform wage pressures, inflation and other macro challenges, according to Guggenheim Securities analysts Robert Drbul and Arian Razai, who believe the Marshalls and TJ Maxx owner has managed to stick shoppers with higher costs while protecting its own margins.
“We continue to view TJX as the strongest company and operator (management, financially, and from a buying organization standpoint) among our off-price coverage. In addition to the ongoing desire of consumers for the treasure hunt experience, we expect the company to continue to benefit from strong Home and Active category sales, including its small but budding online initiatives,” they wrote in a recent research note. The analysts also believe TJX can “either raise its ticket in total or adjust its average unit retail surgically on a select amount of goods into 2022.” If freight costs level off this year, the off-price company could “return to double-digit margins as we look out to next year,” they added.
In its third-quarter earnings call, TJX CEO Ernie Herrman described the company’s flexible model as a strategic that enabled the off-price player to “expand and contract categories and merchandise in our stores so that customers have full racks and shelves to shop when they visit.” An upwards revision to prices was already “well underway,” he said at the time, echoing Guggenheim’s point on price hikes. In addition, Herrman said TJX remains “very optimistic” about its “margin opportunity.”
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The Guggenheim analysts expect TJX to grow its market share and see better store traffic resulting from Covid vaccine distribution and unit growth opportunities.
Among the value retailers, Guggenheim is bullish on Kohl’s, which is poised to get a boost from Sephora shop-in-shops, Tommy Hilfiger and Calvin Klein hitting store shelves, as well as new Eddie Bauer product, high-growth e-commerce, burgeoning active categories and the women’s apparel reset.
“While there are concerns around Kohl’s ability to maintain its gross margins in 2022, we believe [CFO Jill] Timm remains diligent and vigilant around inventory levels and believe management will exceed consensus margin expectations in 2022,” the analysts wrote. In addition, the Sephora rollout and the Amazon Returns program have proven to be solid traffic drivers for the company, and should aid in revenue recovery and growth, they said.
Walmart and Target stand out to Guggenheim as omnichannel leaders. “We expect Walmart to continue to navigate the numerous headwinds it is facing adeptly in 2022. We also continue to see significant potential value creation in its Flipkart subsidiary and look for continued traction in its high margin alternative revenue streams, such as advertising,” Drbul and Razai wrote.
Walmart CEO Doug McMillon believes Walmart can take advantage of both deflationary and inflationary environments, adding that the retailer has “lots of flexibility as we monitor price gaps to decide what we do with general merchandise.” Selling ads helps suppliers and marketplace providers grow their business, with the U.S., Flipkart and Mexico driving “rapid growth and advertising income,” he added.
The Guggenheim analysts believe Target remains well positioned to win market share with its robust omnichannel strategies.
“We believe Target is emerging from the COVID-19 pandemic in a very strong competitive and financial position. The company’s strategy (store growth and expanding digital fulfillment capacity in stores) has proven out, continues to gain traction, and appears set for continued success well into ’22, in our view,” they wrote.
Levi’s, PVH, Coach owner Tapestry and Capri, the parent to Versace and Michael Kors, also got shoutouts as apparel leaders.
“As Levi’s continues to premiumize the brand, we expect continued strong momentum in the denim cycle and sustainable brand strength, which is demonstrated by Levi’s pricing power and AUR increases. We are encouraged by Levi’s offensive strategy, strong brand, experienced management team, and healthy financial position,” the Guggenheim analysts wrote.
They further expect an “outsized opportunity” for PVH to benefit from a tourism rebound, lower costs after corporate streamlining, and a sourcing review.
For the handbag, accessories and luxury sector, Tapestry and Capri are standouts, despite high exposure to the Chinese market. Both are seen gaining from limited promotional activity and increasing operating margins into 2022. Both Tapestry and Capri have demonstrated considerable “pricing power,” the Guggenheim analysts noted.