Barclays on Retail: Cost Pressures Abating in 2012

November 1, 2011 1:34 PM EDT
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Price: $29.44 -1.54%

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Barclays on Retail: Cost Pressures Abating in 2012

Barclays analyst says, "Given the steep (53)% decline in cotton costs to $1.00/lb today compared to the March 2011 peak of $2.15/lb, combined with less global demand for apparel, we expect to see a significant reversal in input cost trends to a tailwind in 2H12. Generally, we would estimate that materials comprise 50% of total costs...We would estimate that labor comprises 25% of total apparel costs."

"With gross margin pressure during 2H11, many retailers and apparel companies have noted that the low cost cotton will begin to flow through the P&L in 2Q12 or 3Q12. While this should be a benefit to most apparel companies/manufacturers next year, some navigated the challenges better than others this year (Macy's (NYSE: M), Ralph Lauren (NYSE: RL), Saks (NYSE: SKS) and Nordstrom (NYSE: JWN)). Higher prices have been met with some resistance in mid-tier chains such as Kohl's Corp. (NYSE: KSS) and J.C. Penney (NYSE: JCP) , which target more price sensitive, moderate consumers. In addition, Kohl's and J.C. Penney, also have outsized private brand and private label businesses (48% and 54%, respectively), which appear poised to benefit from the easing of cost pressures. Given these factors, we remain comfortable and would highlight our above consensus 2012 estimate of $5.15 for Kohl's and trading at just 10.3x our 2012 estimate, we continue to see upside for the stock. Our target is $65."

"With regard to apparel companies/manufacturers, while most will benefit, we believe PVH Corp. (NYSE: PVH), VF Corp. (NYSE: VFC), Warnaco (NYSE: WRC), Hanesbrands (NYSE: HBI), among others should see the most upside giving pricing decisions made in 2011 and strength of their brands at the retail. In particular, one company best positioned to benefit is PVH; we would estimate that cotton/fabric is 35%-40% of COGS, while labor is 30% of COGS. Tommy and Calvin should be able to maintain the 2011 price increases in 2012, while its Heritage brand portfolio (IZOD, Arrow, Van Heusen) will benefit from lower costs, having been challenged with price increases this fall. This morning, we are increasing our 2011 and 2012 estimates to $5.15 and $5.90 from $5.12 and $5.80, respectively. We are also increasing our price target to $90 from $80."

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