EXEC: Cowen Delivers Weak Holiday Forecast


A report by Cowen, the independent multinational investment bank and financial services company that operates through two business segments - broker/dealer and investment management division, after a recent consumer survey, gave a dismal view of holiday spending as it sees discretionary spending trends weakening and inventories reaching levels Peak to push the pressure cuts.

In addition to higher currency exchange risks, Cowen believes gross margin estimates are “too high” as consensus estimates assume margin expansion for 95 percent of Coin’s coverage in the space in fiscal year 23.

Quinn said he was “cautious” about third- and fourth-quarter guidance for Under Armor, Burlington Stores, Adidas, Allbirds, Hanesbrands, Puma, PVH, Skechers and Figs. The investment firm lowered its price targets by covering it.

“There are record high levels of inventory across the sector with slowing demand,” Quinn noted in his report. “The consensus forecast for gross margins to 2023 is very high with higher discounting provisions, higher storage costs, higher cost inventory flows on income data and increased FX pressure (cost of goods sold in dollars and sales in weaker currencies). Nike 150 basis points increase in cuts pressure by a quarter One in the company’s fiscal year calendar indicates a fragile environment.”

Quinn said the Monthly Collaborative Ownership Survey showed that 77 percent of respondents in August 2022 indicated that prices for daily purchases increased compared to last year, unchanged versus July 2022 and before 60 percent in February 2022. The survey also showed that prices for daily purchases increased compared to last year , unchanged versus July 2022 and before 60 percent in February 2022. Events, travel and apparel were the top three areas consumers expected to spend a lower share of their wallets.

“In the face of greater macroeconomic uncertainty and an increasingly promotional environment, retailers can be challenged by both cuts in consumer spending and cuts to product lines and affordable brands,” Quinn wrote.

The survey showed that when consumers were asked if they plan to cut their spending in response to the inflationary environment, 64 percent said they intended to cut back in August, in line with figures in the July 2022 survey but higher than 50 percent of consumers in February 2022 said they would cut back on spending. in response to rising costs.

In terms of inflationary pressures, work continues to be a headwind with two job openings for every unemployed person based on data from the US Bureau of Labor Statistics, up 53 percent from pre-COVID levels.

Quinn estimates that labor costs in stores and distribution centers account for about 8 to 10 percent of sales to retailers.

SG&A pressure for stores and distribution centers (employment 8 to 10 percent of sales for retailers) continues to be a headwind. Federal funding rates expect the final interest rate to be around 4.6% in fiscal year 23, which, in theory, should raise the unemployment rate — moving to a 5% unemployment rate would result in two million job losses.

With housing affordability at a 20-year low, Cowan predicts that shelter costs, 32 percent of CPI, could put pressure on core inflation readings.

Other headwinds for core inflation are housing/rent, with housing affordability at a 20-year low and shelter costs at 32 percent of the Consumer Price Index (CPI), the largest component of any category. Quinn wrote: “While this category has not experienced the rapid acceleration that was present in other categories such as energy, housing inflation has risen steadily from 2 per cent year on year at the beginning of 2021 to current levels of 6 per cent. Ex-food, energy and food are the second largest components of the CPI at 19 percent and 14 percent, respectively.”

Quinn sees downside risks to the industry’s holiday sales outlook and plans.

“Holiday 2022 is shaping up to be a very different dynamic from 2021 due to several macro pressures that are likely to negatively impact the level of holiday consumer spending compared to previous years along with high inventory levels across the sector which are starting to launch a cliff in promotional writedowns. Quinn noted.

Quinn expected core CPI inflation to be around 6 percent, and core “real” retail sales growth, excluding food and gas, at 0.5 percent year-over-year, a nominal holiday of 2022.

Quinn wrote, “With promotional activity ramping up during the second half of 2022, Holiday 2022 will likely reflect a return to the highly merchandising cadence of years past among both retailers and brands, whether they are brick and mortar, multi-channel or digital local.”

Adding to the promotional atmosphere, Amazon has added a second Prime Day for 2022, called Prime Early Access, to run from October 11-12. Target is also running a holiday event from October 6-8.

In other notes, Quinn writes: “E-commerce traffic moderates broadly across the consumer ecosystem and within retail lines. Customer acquisition and retention costs rise in search and social commerce.

“Promotions are increasing across search engines and social platforms. Cowen continues to see promotions increase across search engines and social platforms.

“During the first half of 2022, the savings rate fell to 5 percent, or below pre-pandemic levels.

“We are still in the early stages of transitions to services, and discretionary goods could suffer as the economy slows amid rising interest rates and comparing difficult consumer spending,” Quinn reported.

On the positive side, Quinn noted that shipping, fuels and some raw materials, such as cotton, have experienced a “deflationary trend as US consumer demand slows, providing prospects for the development of future margin relief for retail brands and consumers beginning at some point in fiscal year 2023. But that will likely not be before the second half of fiscal year 2023.”

The company noted that freight rates on containers moving from Shanghai to Los Angeles fell below $4,000 to $3,779 in the last week for the first time since September 17, 2020, and prices have fallen by nearly 70 percent from the peak of September 16, 2021; However, the war in Ukraine, China’s policy of “zero tolerance” for COVID-19 and tensions with Taiwan “suggest a macro- and geopolitical environment causing some of the highest asset-volatility volatility in history across interest rates, foreign exchange, and fixed income. Equity valuations / Discount rates, Kwan said.

Kwan continued, “Direct changes in fiscal and monetary policy in North America and Europe are likely to keep volatility high across financial markets, which will fuel consumer sentiment and behavior. It is difficult to see solutions to many of these issues in the near future.”

Image courtesy of Walmart/Getty