By Kelly Evans
The recent commodities price spike may have a silver lining for retailers—if it leads some to pare back inventories.
On Wednesday, Macy's Inc. will report first-quarter earnings that usher in a spate of department-store results. The company's shares have trailed the broader market this year, but are up about 8% this month.
That was helped by last week's figures showing sales at stores open a year or more rose nearly 6% in April from last year. Meanwhile, rivals J.C. Penney Co. and Kohl's Corp., posted gains of 6.4% and 1.3% respectively. Kohl's reports earnings Thursday and J.C. Penney reports on May 16.
Yet Macy's shares are still the cheapest of the bunch. They trade at just 11 times estimated 2011 earnings, compared with an average of 14 times for department stores. Strong results Wednesday should help close that gap.
Certainly, cost pressures stemming from surging cotton and fuel prices remain a concern for Macy's profit margins. But the real test may be its discipline on inventories.
As for the department stores, "the one I'm most concerned about is J.C. Penney," says Morgan Stanley analyst Michelle Clark. Its inventory growth began outpacing sales growth in the fourth quarter, she notes, and shares are currently trading at 16 times earnings.
Plus, J.C. Penney may not be acting aggressively enough to trim inventory, which it plans to leave flat to slightly down this year. Kohl's, on the other hand, is planning in the second half to lower unit levels 10% to 15% compared with a year ago. That is because the company had been hoping to raise prices by at least that much to offset cost pressures.
Macy's also is expected to order fewer units, and it may have more success raising prices thanks to its higher-income shoppers and expected market-share gains from rivals. With cost pressures biting, retailers look ready to give up some sales before they dent margins. The richer their clientele, the less they may have to sacrifice.
