Shop Talk

Retailers, consumers and prices

Check out line: Not Costco, too?

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costco1.jpgCheck out the earnings warning from Costco.
 
Warehouse clubs were supposed to be benefiting from the weak economy and soaring gas prices as consumers, hit by rising food costs and gasoline prices, looked to save money.
 
But it turns out that benefit might only be on the sales side, not the bottom line.
 
Costco said Wednesday that quarterly profit would be well below analysts’ estimates.
 
“Factors negatively affecting our fourth-quarter earnings outlook arise largely from inflation, particularly as to energy costs,” Chief Financial Officer Richard Galanti said in a statement.
 
The company is making less money on its gasoline operations and margins on its merchandise were also down as it tried to maintain prices that would attract customers, Costco said.
 
Warehouse clubs and discounters had been some of the better retail sales performers in recent months.

So is Costco’s warning specific to the company, or is the lower-priced part of the retail spectrum taking a hit now, too?
 
Also in the basket:
 
Philip Morris International beats Wall Street view
 
Hershey profit down excluding charges
 
A lean holiday season: stores cut inventories, but hope glitz is gold (WWD)

(Photo: Reuters)

Check Out Line: Looks like inflation worth whining about

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gas.jpgCheck out how much stuff costs.
 
Consumer prices rose 1.1 percent in June, the biggest monthly increase in 26 years. The culprits are the same as we have seen for months: energy prices rose 6.6 percent from May, with food up 0.8 percent.
 
Overall, prices were up 5 percent from a year ago. And not to whine about it, but it looks like more price hikes could be on the way, as food and consumer products companies continue to grapple with rising energy and commodity costs.
 
The news puts the Fed in a bind, economists said. Rising inflation means the Fed isn’t likely to be able to cut rates anymore, which means help for shoppers in the form of lower interest rates. But with the economy still weak, the Fed also may not be able to raise rates to tame inflation, which means prices could continue to soar and further pressure consumers.
 
“We have to get used to the idea of 5 percent (annual) headline inflation,” Alan Ruskin, chief international strategist at RBS Greenwich, said.
 
Also in the basket:
 
P&G Global marketing chief Stengel to step down (Ad Age, WWD, WSJ (subscription required for the last two) )
 
Quick hook at Halston: Creative Chief Zanini said to be out at label (WWD)

Furniture Brands speeds up cost cuts, warns on ’08

(Reuters photo)

Check Out Line: 2009 doesn’t look that great, either

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clouds.jpgCheck out what Morgan Stanley is saying about retailers and restaurant owners.
 
It isn’t good. Morgan Stanley is cutting its 2009 earnings estimates and price targets, saying its retail sales lead indicator dropped 1.1 percentage points in June, and the key reasons — home prices, unemployment and food and fuel inflation — are not likely to improve anytime soon.
 
The indicator, which uses a bunch of factors to predict future retail sales, is down 3.7 percentage points from a year ago and the outlook for the second half of 2008 looks grim, Morgan Stanley said in a research report.
 
“We see the likelihood of a decelerating 2008 carrying over into 2009 growing,” Morgan Stanley said, adding that the tax rebate checks making their way into the system will not be enough to offset macroeconomic headwinds in 2009.
 
Tax rebate checks “may actually have a pull forward effect that could make conditions worse for retailers into 2009,” Morgan Stanley said.
 
Also in the basket:
 
Chico’s June same-store sales fall 12.9 percent
 
M&S’s Rose faces stormy showdown with shareholders 
 
(Photo: Reuters)

Check Out Line: Woe be the consumer

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clouds1.jpgCheck out a couple more bleak consumer signals.
 
The Conference Board on Tuesday said that U.S. consumer sentiment fell to its lowest level in 16 years. One analyst, Dresdner Kleinwort Securities’ Dana Saporta, said the sentiment gauge has dropped 55 percent from its peak in July 2007, a bigger decline that seen after the Sept. 11 attacks and Hurricane Katrina.
 
So even with consumers getting those tax rebate checks, they might not be in much of a mood to ramp up spending in the face of soaring gasoline and higher food prices.
 
In fact, Citigroup retail analyst Deborah Weinswig lowered her estimates on department stores and several other retailers today.
 
“While (the second and third quarter)  could benefit from the tax stimulus checks, we expect current pressures facing the consumer, including across-the-board inflation, housing and credit concerns, and a deteriorating employment picture, to continue to weigh on consumers for at least the remainder of 2008 into 2009,” she said in a research note. 
 
Consumers are also showing some signs of cutting back at the grocery store.
 
Kroger said on Tuesday that it has seen an increase in sales of its private-label brands. That could be bad news for makers of brand-name foods. Both brand-name and private-label food prices have gone up as manufacturers try to offset soaring commodity costs.
 
The branded food companies have argued that as long as the gap between their price and the price of private-label products does not get out of whack, then consumers will still see the value in the branded products.
 
But if consumers are getting to the point where they just need to save money, even if it means giving up the brands they love, that could squeeze the big food companies.
 
Also in the basket:
 
Hollywood Labor strike: Retailers dread impact of walkout by actors (WWD)
 
Athletic-Wear Firm’s Olympic Dream Fades (Wall Street Journal
 
(Photo: Reuters)

Check Out Line: Benign inflation, if you don’t eat or drive

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gasoline.jpgCheck out inflation.
 
That $4-a-gallon gasoline really drives up consumer prices. The Consumer Price Index rose 0.6 percent in May, the largest increase since November. Year-over-year, consumer inflation was up 4.2 percent.
 
The so-called “core” index, which excludes food and energy, rose only 0.2 percent in May and 2.3 percent year-over-year.
 
But most consumers eat, drive and use heat or air conditioning. So soaring prices for energy and rising food prices — up 0.3 percent in May and 5.1 percent year-over-year — cut into what consumers can spend on clothes, home goods and other discretionary items. 
 
It also could mute the impact of the tax rebates consumers are receiving.
 
“Consumers are spending more to buy food and energy,” Lindsey Piegza, market analyst at FTN Financial, said. “The tax rebate is just offering them a cushion. They are not buying wide-screen televisions.”
 
Also in the basket:
 
Anheuser in talks with Grupo Modelo (WSJ, subscription required)
 
Battling a bumpy road” economic downturn (WWD)

Higher price for Anheuser not a sure thing

Budweiser could pay price for being “America’s Beer”

 (Photo: Reuters)

Product cost inflation is real, it’s very real

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cashregister.jpgDuring Big Lots’ conference call, the closeout retailer was asked what it is seeing in terms of product cost inflation, especially when it comes to merchandise that is sourced in Asia.

CEO Steve Fishman was unambiguous in his answer: “That’s real. That’s very real”

Check Out Line: Food for thought

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shopper.jpgCheck out upcoming earnings and what they might say about food costs.
 
Food inflation is one of many factors putting pressure on U.S. consumers. (Housing, the credit crunch and soaring gasoline prices are some of the others.) But so far, big packaged food companies have been sticking to the mantra that consumers are willing to pay a little more for their wares as long as perceive they are getting a benefit in return.

Next week promises to offer snapshots on how rising food costs may be affecting consumer behavior. That’s because both Kraft, the largest North American food company, and Kellogg, the largest cereal maker, are slated to report earnings.
Kraft gave reporters a preview this week of new products they are launching, and none seemed to be geared to consumers trying to cut back on spending.
 
But grocery store operators seem to know that many consumers are scrambling to pay for necessities like food these days. Both Kroger and Supervalu are offering bonuses for consumers who turn their tax rebate checks onto gift cards to be used in the store. (Those rebate checks also are expected to start coming next week.)
 
So the question is, are things different this time around? Will the rising cost of fuel and food and an economy that might be in recession cause consumers to trade down to store brands and other cheaper alternatives?
 
Also in the basket:
 
Rising food prices are “global crisis”: U.N. chief
 
Charming Shoppes exploring alternatives on non-core assets
 
Protest-hit Carrefour cancels China sales plan
 
Plastic bottle scare is a boon for some (N.Y. Times)

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