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Minyanville Mailbag: Trade Wars and Retailers

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"Google.... I truly have no shame..."

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I'm feeling a little "tight" with Herb Greenberg's arrival to the 'Ville. He's a consummate pro; a firm, steady rudder in market seas choppy or calm. In contrast, I'm snarky and fond of brown blazers.

With the writing bar thus raised I'll try to keep it simple, and less snarky, with a creativity-lite Tubthumping Mailbag (don't make me do bullet points).

Minyan Jim Writes:

Dear Jeff,

I read your article on the impact of a change in China's pricing on a retailer's cost of goods.

I used to be the Controller of a large drug store chain. To the extent that consumers don't reduce their consumption of goods, a rise in the cost of goods could benefit retailers tremendously.

Here's why. A retailer's merchandising department is typically split up where a manager is in charge of a certain segment of goods. Merchants are focused on gross margin (% of sales, not dollars). If their gross margin target is 30% for a certain category of goods, a hike in the cost of goods is going to flow to retail with the same 30% margin.

As you can see, the same margin on a higher retail price means more gross profit dollars per unit sold. Yes you will probably lose some unit volume due to the price rise, however I think overall gross profit dollars would rise.

Retailers have tremendous leverage to earnings due to very high fixed costs (building rent, labor, etc.). Incremental gross profit dollars flow almost 100% to pretax income.

I think a hike in Chinese cost of goods is a huge boost for Walmart. They get the opportunity to raise prices and gross profit dollars and still maintain their relative competitive pricing advantage since all retailers are in the same position.

From a public relations standpoint, the public's anger at a price rise will directed toward China rather than the retailer.

For many non-discretionary consumer retailers, a Chinese hike in prices is likely a big boost to earnings.

Just sharing some thoughts. Enjoy your comments on Minyanville.


Jim

Thanks, Jim! You raise a couple of interesting points:

  • Margins: You're right, to the extent that the cost hits can be passed along to the consumer, the net effect will make the strong retailers stronger in the sense of their relative price position being unaffected.

It depends in large part on how the US would go about a hypothetical trade war. If you're Best Buy (BBY) you'd have an interest in sticking to textiles ("the real core of America!"). If you're Bed Bath & Beyond (BBBY), you don't really want any part of a pure-textile tariff, regardless of how much worse it may hit Linens N' Things (LIN).

  • The Public: I think DC's overall read on American outrage over the Chinese is off base. As a nation we are proud hypocrites, by something of a tradition. I think we are collectively "concerned" in a vague way over Chinese practices. What we truly care about, late at night in the humming darkness of our electronics laden bedrooms, is paying rock bottom prices for a better stereo than our neighbor.

Picking a fight with China is going to hurt stock markets and raise prices. America likes strong markets and ever-descending prices. Being "Strong on Trade" makes a great soundbite but it's a horrible idea, in practice.

Minyan J-Dog writes:

HEY MACKE:
JUST FOR THE RECORD (PUN INTENDED) YOU CAN TELL YOUR READERS THAT THERE IS A BIG DIFFERENCE BETWEEN SONG OF THE YEAR AND RECORD OF THE YEAR. THE FORMER IS AN AWARD TO THE SONGWRITER/COMPOSERS AND THE LATTER IS AN AWARD TO THE RECORDING ARTIST AND HIS/HER RECORD COMPANY.

JUST KEEPING EVERYONE UP ON THE MUSIC INDUSTRY. (AND BY THE WAY, I'M A LONG-TIME MEMBER OF NARAS, THE GROUP THAT GIVES OUT THE GRAMMYS).
REGARDS,
JUDITH

J-Dog, the Mynians have been so notified. As a side note, your membership in the NARAS probably explains the all-caps thing. "If it's loud it'll sell with the kids".

As an informed source, maybe you can help me out with something. The UPS guy just dropped off two Grammy's in the category of "Best spoken word on a morning financial cable news show segment, snark category". My question is, are these made out of real gold and, if so, could you tell me exactly how much?

The guy down on the corner tells me "in Philadelphia, it's worth 50 bucks" but I'm wondering if I can't do better.

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No positions in stocks mentioned.

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