Weekly Spin Cycle: May 7, 2012
Let’s be honest. Management teams are always putting their best foot forward. Press releases and conference calls are filled with Truthiness.
Each week, we’ll challenge “managerial spin” and offer some news and commentary about the retail industry. You are encouraged to provide any feedback to info@RetailGeeks.com.
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Following Heavy Markdown Reserves in Q4 2011 – Stronger than Expected GPM% in Q1 2012
The dominant story line that’s shaping up for the upcoming retail earnings season is the stronger than expected GPM%.
All you have to do is look at perennial under performers AEO and GPS. Both companies reported a dramatic GPM% decline in Q4 2011 versus the prior year (-534 Bps at AEO and -544 Bps at GPS). But, today’s EPS guidance for Q1 2012 (in our view) implies a +25 Bps GPM% improvement versus LY at AEO and a -100 Bps GPM% decline versus LY at GPS.
AEO’s and GPS’s relatively strong GPM% in Q1 2012 versus Q4 2011 is telling us that GPM% is likely to be much stronger than expected across the board when retailers report their quarterly results over the next few weeks.
It’s probable that many retailers that reported massive GPM% declines in Q4 2011 (e.g.AEO, ANF, GPS) provided for an over-sized markdown reserve at the end of the fiscal year. Yet, sales and margin were likely much stronger in Q1 2012 than management teams envisioned when they provided for the Q4 2011 markdown reserve in late-February or early-March. Check out our note on ANF from earlier in the week as they’re the only retailer we know that discloses their quarterly markdown reserve.
Following an ‘artificially’ strong quarter (weather, color tailwinds), retail management teams are likely feeling much more at ease with the promotional environment today than 3 months ago. Therefore, we’re likely to see much stronger GPM% trends in Q1 2012 than was contemplated 3 months ago as management teams began to unwind their markdown reserves.
Unfortunately, except for ANF, we’ll never know how much or how little a management team “unwinds” their markdown reserve in Q1 2012 (or any quarter for that matter) as the markdown reserve is not only subjective…but, it’s not disclosed.
Of course, now that the weather tailwinds begin to disappear, the promotional environment could return to the levels seen in the holiday season. But, we’re betting that most management teams will let the top-line and bottom-line tailwinds that boosted the last 3 months “go to their heads” when providing EPS guidance for Q2 2012.
Compology
This month we’re measuring relative top-line strength/weakness in April 2012 by comparing the month’s 2-year comp store sales ‘stack.’
Let’s keep things in perspective. Take a look at the 4-year comp store sales run rates for the following monthly sales reporters.
