When listening to conference calls this retail earnings season, analysts are asking each management team to quantify go forward sourcing savings.  It’s clear that analysts and management teams believe these savings to be largely incremental to the bottom-line.
 
Yesterday, Target (TGT- 41.60) management made the following statement (see transcript below) that reflects their belief that they’ll need to lower pricing to remain competitive.  Maybe they’re being conservative, but clearly their comments do not suggest a bottom-line benefit from the lowered sourcing costs.  
 
That brings up the following questions… why do management teams (and analysts) believe that they’ll be able to maintain the current pricing structure and ‘pocket’ the savings?  Why will retail, overall, not face AUR pressure in 2H 2009 if the sector lowers its pricing to reflect the newly lowered sourcing cost structure?  Why will this not lead to the price deflation we’re seeing today at the grocers?  Why would specialty retail be any different?

TGT Conference Call May 20, 2009:

Charles Grom - J.P. Morgan – Analyst

Okay.  Great.  And then, one for Kathy.  Just Penney’s and Kohl’s have talked to source and costs down anywhere between 3% to 10% in the back half of ‘09 and even more so in 2010.  Just wondering, I know you guys have a little bit of a different sourcing by region, just wondering about the decent ballpark for you?  And a little bit of sense for how you think that could support gross profit margins in the back half of the year?                                   

Kathy Tesija - Target Corporation – EVP Merchandising

I would say that that’s within the range of what we expect. I would guess probably more like 5% to 7% or 8%.  And we’ve seen some of that already this year but we believe that it will grow as we move through the quarter here.  And in terms of how that translates to gross profit, I think a lot of that will be reinvested in pricing, to make sure that we’re offering the best value to our guest.  And so, at this point, it’s hard for me to tell you exactly what I think will flow through.  But I would say that most of that is going to be reinvested in the product.

Gregg Steinhafel - Target Corporation – Chairman, President and CEO

Yes, I would agree, we expect these same kinds of price decrease that we’re experiencing.  Other retailers are going to get the same kind of pricing decreases.  So, it’s really about making sure we’re competitive, that we’re growing our market share, particularly in these profitable discretionary categories.  So, that’s really the number one priority, is to be right in terms of price in the marketplace.  And if we can flow a little bit to the bottom line, that’s an additional benefit.  But first and foremost, is being competitive and increasing our market share.