Another Reason To Run...

From retail stocks.

The natural squabbles that arise in crisis are starting to play themselves out. However, this one is huge. Primarily because it deals with what has already happened, as well as the future.

A little known side of retail are the guarantees that vendors make with large stores for their profit margins. Retailers are more likely to buy more merchandise if they know vendors will cover the difference for the items that are sold under the agreed level of profitability, usually in the neighborhood of 40%.

This article (HERE) spells out the "war" playing itself out now between vendors and retailers, due to the tremendous, and early, markdowns taken this holiday season. The thing that makes this so critical is, this is the time of year retailers usually await checks making up the difference in the margins from vendors. This year the opposite is happening, with vendors negotiating to receive re-payment for the unprecedented discounting of their goods by several major retailers.

As Cotten Timberlake at Bloomberg reports:

If vendors succeed, they could recoup $1.2 billion from Macy’s, Penney, Kohl’s, Nordstrom, Dillard’s and Saks Inc. alone, based on analysts’ average estimated fourth-quarter sales of $24.2 billion for those six chains.   (emphasis is mine)

Which means, not only will retailers be hit by much smaller profit margins than anytime in the last 40-50 years, not only will there be no gross margin dollars flowing to them from vendors that usually guarantee those profit margins, but the retailers, after all this bad news is sorted out, will be making payments to these vendors, further reducing profits.

That may be the biggest story in retail so far to emerge from a season of big stories.

Keep an eye out.

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