Do You Think Apparel Retailers Re-Captured LY’s Source Cost Pressure? Think Again.

It’s all about CONTEXT!

Many company management teams and traditional sell-side analysts “dumb down” their analysis with a simplified focus on a comparison to the prior year. But, we believe that there should be more attention paid to a 2-year or 3-year horizon.

Let’s take a look at the 2-year and 3-year GPM% changes in Q3 2012 for a select group of apparel retailers that have reported their quarterly results thus far (see tables below).

Yes, other than the ‘pure’ merchandise margins reported for ANF and PLCE, it’s difficult to parse out the impacts of store occupancy, distribution, et al. But, if we view the Q3 2012 GPM% performance versus Q3 2010 (2-year), we believe the results provide a bigger picture understanding of which business models were able to ‘re-capture’ last year’s ‘lost’ merchandise margins (via higher sourcing costs).

Many apparel retailers have been unable to ‘recapture’ last year’s sourcing cost pressure. This may be indicative of larger structural problems with their respective business models. Just food for thought.

ARO, JCP, PLCE and URBN are clear underperformers on a 2-year and/or 3-year time horizon. This suggests what we view is a permanent lowering of their respective annual GPM% expectations.