Piper Jaffray Believes Retailers Will Slash Prices Once Again (JCP, KSS, TGT)

Piper Jaffray is out with a research report this morning, where it takes a look at the increase in inventories at retailers versus each company’s pricing power. The PJ analysts said, “Our proprietary pricing analysis points to further apparel price declines in July.” They added, “This would be the sixth consecutive month of declines, but is on pace for a more moderate Y/Y decline versus the previous two months. Our analysis focuses on the mass merchant retailers Target TGT, JC Penney JCP and Kohl's KSS by comparing year-over-year price changes in like items advertised in weekly circulars. Once again, Kohl's has the strongest pricing with a +1.2% increase for the month. This is the sixth consecutive month Kohl's had the strongest pricing. For JC Penney (-4.2%) and Target (-5.1%), we observed larger price declines consistent with their strategy to increase market share by driving key items.” They further noted, “In May, apparel imports increased 18.4% Y/Y on a unit basis. This was the most growth since May 2005 and the last four months have averaged 16.1%. We believe this double-digit growth will need to moderate to avoid overstocking. Apparel imports by dollar volume increased 13.0% Y/Y in May, accelerating from March (+9.5%) and April (+9.8%) levels. The level of imported units does indicate retailers' speed of restocking. We anticipate continued unit growth for the remainder of the year as retail buyers plan to drive sales to generate leverage on fixed expenses versus maintaining prior peak merchandise margins.” The Piper Jaffray analysts also noted, “Merchandise margin gains in late 2009 and the first half of 2010 are likely to moderate during the back half of 2010. Comparisons become more challenging and input costs have risen during the past few months. Increases in transportation costs are likely to become a headwind and raw material price increases/shortages will likely have a pronounced effect in 2011. Gross margin expansion should remain subdued as retailers lose the tailwind from declining inventories but can still benefit from operating leverage. We believe select retailers can show gross margin improvement in the second half of 2010 and 2011 due to changes in product mix, higher sales of private label brands, and higher direct-to-consumer sales.”