Morgan Stanley Thinks Retailers Will Ramp Up Discounting In January

  • In the week 5 December store checks, Morgan Stanley analyst Alex Straton observed a slight week-on-week decrease in retail foot traffic and broadly higher year-on-year promotional clearance breadth.
  • More specifically, footfall appeared to decelerate from December Week 4 levels, an understandable pullback post-holiday, & likely reflective of a return back to the depressed 2H November through December Week 3 trend, the analyst said.
  • The analyst said the checks point to seemingly challenged traffic/sales trends, but retailers continue to hold the line on promotion/discounting activity.
  • However, the analyst views December week 5 checks as an incrementally negative data point, as total discounting activity trended above 2019 levels on average for the first time in the month.
  • The analyst added that this is a deflationary category where the price is often a key purchase influencer/competitive advantage. This likely means other retailers could quickly follow suit in January to spur demand/sales.
  • The analyst fears that the promotional/discounting activity likely will only worsen from here.
  • Straton said Bath & Body Works Inc BBWI semi-annual sales featured promotional breadth & depth in-line with last year & shallower than 2019.
  • While seasonal inventory levels appeared high, BBWI previously stated they would rely on this sale to clear inventory, & the analyst is encouraged by a noticeable uptick in traffic compared to the prior check.
  • The analyst added that the clearance breadth increased Y/Y and W/W at Lululemon Athletica Inc LULU, drawing exceptionally strong traffic, with shoppers lining up outside the store.
  • Also ReadLululemon' Paid' You To Buy December Dip As Gross Margins Tank Stock: Why Analysts Remain Bullish After Q3
  • Discounting activity at Abercrombie & Fitch CO ANFGap, Inc. GPS owned Banana Republic, Macy's Inc M, and Hollister targeted seasonal items such as outerwear, sweaters & boots, the analyst cited.
  • The analyst finds this approach prudent as a warmer-than-expected January could limit retailers' ability to clear these items later in Q4.
  • In contrast to other Softlines sub-sectors which saw higher y/y discounting breadth, activity at specialty retailers was relatively mixed, Straton cited.
  • The analyst said all of the department stores exhibited higher total discounting activity on a y/y basis largely driven by elevated clearance levels.
  • Handbag retailers Kate Spade, owned by Tapestry, Inc. TPR & Michael Kors, owned by Capri Holdings Limited CPRI, continued to exhibit some of the highest y/y discounting breadth increases across the analyst's checks.
  • Total discounting activity increased at Low Double Digit points y/y driven by High Single Digit points & Low Single Digit points higher promotional & clearance breadth, respectively, similar to December 4th week, the analyst said.
  • However, traffic slowed w/w, total discounting activity came in a touch above 2019 levels for the first time this December, and the analyst observed some initial or continued cracks by banner.
  • According to the analyst, the trend points to discounting activity potentially ramping more fulsomely in January.
  • Price Action: BBWI shares are trading higher by 1.45% at $42.75 on the last check Tuesday.
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