Citi Comments On 2011 Product Cost Outlook (JCP, JWN, KSS, M, SKS, TGT, WMT)

Citi is out this morning with a Product Cost Outlook in the retail industries for 2011. In the report, Citi states that import prices have hit an all-time high in January, and predicts that retailers may be able to offset at least 50% of 2011 product cost inflation, that retailers have some leeway to pass cost increases through onto fashion item markups, and that department stores are unlikely to suffer the same as food retailers. In the report, Citi states, "We expect inflation of 4-6% in apparel and 2-4% in home in 1H11, with inflationary pressures accelerating in 2H11 to 13-15% in apparel and 9-11% in home. Our expectations are significantly higher than the initial projections made by retailers at 3Q10- end, as companies fight rising cotton costs (+155% YOY a/o 2/13/11 vs. +85% YOY a/o 3Q10-end), wage inflation in Asia, increased competition for factory capacity, and a weakening U.S. dollar. These pressures have intensified since 3Q10-end, and we believe that 2011 guidance could be worse-than-expected." Citi lowered its 2011 EPS estimates for JC Penney JCP, Nordstrom JWN, Kohl's KSS, Macy's M, Saks SKS, Target TGT, and Wal-Mart WMT.