Morgan Stanley Thinks Retailers Will Ramp Up Discounting In January - Lululemon Athletica (NASDAQ:LULU), Abercrombie & Fitch (NYSE:ANF), Bath & Body Works (NYSE:BBWI), Macy's (NYSE:M)

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 Read: Lululemon' Paid' You To Buy December Dip As Gross Margins Tank Stock: Why Analysts Remain Bullish After Q3
Discounting activity at Abercrombie & Fitch CO ANF, Gap, 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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