By Marilyn Much
As material and labor expenses soar, retailers can face a lose-lose choice: absorb the costs and hurt already-thin margins or hike prices at the expense of sales from strained consumers.
But popular upscale chains with high margins and strong brands can hike price tags without losing sales.
Yoga apparel chain Lululemon Athletica enjoys strong loyalty for its unique products, says Sterne Agee analyst Jennifer Milan.
"They have an almost cultlike brand loyalty," she said. "They provide yoga-inspired active wear that has a unique aesthetic, and customers gravitate to that."
Tiffany, Deckers Outdoor and Coach also wield enough clout with their clientele to raise prices without a big impact.
The surge in cotton futures is finally filtering down to clothing prices. In second-half 2011, retailers' cost of goods per unit will be 15% higher than a year earlier, figures Sterne Agee analyst Kenneth Stumphauzer.
Chains should be able to offset some of those costs via measures such as moving sourcing outside of China, where labor costs have shot up. But beyond such "levers," retailers will need to raise prices to protect margins from painful declines, he says.
Retailers are expected to raise prices on goods that hit the shelves in the summer and fall.
Average apparel prices will rise 10% to 12% in the second half vs. last year, predicts Stumphauzer.
How much of their higher costs retailers pass on will depend on what they think the customer is willing to absorb, says John Long, a retail strategist at consulting firm Kurt Salmon.
Unique goods are key, says Joel Bines, managing director with AlixPartners, a consulting firm.
"Exclusivity is the only thing that creates pricing power in retailing," Bines said. Tiffany sells largely exclusive products to customers that tend not to be price conscious, he adds.
Soaring material costs prompted the jeweler to raise prices in February 2010 and January 2011.
On silver jewelry and other items where inventory turns rapidly, cost hikes flow through Tiffany's gross margins faster, requiring a "sooner price increase" than on slower-turning items, says spokesman Mark Aaron.
"All we want to do is maintain the gross margin on a specific product, and we believe our customers understand that," Aaron said.
Pricing Power, With Limits
Tiffany knows it doesn't have "unlimited pricing power," he added.
Lululemon also lacks pricing omnipotence. Costs should pressure gross margins later this year, analysts say. But its strong profitability means it can afford to take a modest hit.
Meantime, analyst Christopher Svezia of Susquehanna Financial said, "Deckers has made select pricing increases on key products over the past several years in response to supply constraints of sheepskin and due to product mix, and it hasn't affected sales."
He added, "Ugg is very controlled in its distribution, their products are in demand and they continue to evolve the assortment. As a result, their pricing power is that much stronger to take it up if necessary."
Svezia expects Deckers to hike prices again this year to offset higher sourcing costs. Stumphauzer figures the fashion footwear firm could raise Ugg boots prices by $30 and its loyal customers wouldn't hesitate to pay.
Coach, which reports fiscal Q3 results Tuesday, is a luxury handbag and accessories retailer and designer that caters to high-end shoppers. CEO Lew Frankfort told IBD in an interview in January that it will pass on some of its higher input costs.
