Morningstar Advisor - October/November 2010 - 62

Sector Rap

activity coming from this category, especially during the back-to-school season, so it will hurt these retailers both from a top- and bottom-line perspective. We’re also seeing a lot of promotional activity in the department stores, putting downward pressure on their prices. So, in turn, this will likely hurt off-price retailers, because the pricing gap will be narrowed, pulling some traffic from the discount/off-price channels into department stores.
Q: Are retailers facing rising costs? Tan: Starting earlier this year, we’ve seen

home in the spring of 2011. Because it’s more difficult to raise prices in a difficult consumer environment, it’s something that retailers are watching closely and working with their manufacturers to try to contain. But in certain sectors, like children’s apparel, cotton is a big part of their costs, so they would have to price strategically.
Q: Are Internet sales matching the trends in bricks-and-mortar retail? Hottovy: Actually, e-commerce sales have outperformed the bricks-and-mortar retailers. We’ve seen some pretty lofty sales numbers out of the e-commerce channel for a number of retailers, including department stores. Q: Such as? Hottovy: Wal-Mart WMT has seen some good numbers, Macy’s M has seen some good numbers, Best Buy BBY—it’s a pretty long list

of retailers that have seen some exceptional growth in the e-commerce channel. And, frankly, we’re not surprised. E-commerce is going to be an increasingly critical driver of profitable growth over the next several years. It’s a cost-effective way to gauge consumers’ interest in new products and new concepts; it’s also an easy way to liquidate excess inventory. So, I think that we’ll continue to see e-commerce outpace the bricks-and-mortar side of the business for an extended period of time.
Q: Is this e-commerce growth isolated to a particular type of retailer, or is it pretty much across the board? Hottovy: It’s pretty broad-based, but if you had to point to one area of explosive growth, I would probably highlight the apparel category more than anything else. Tan: There are a few interesting things that

raw material prices going up—cotton in particular—and distribution costs going up for retailers. That’s something that retailers have mentioned when we’ve spoken with them; because they buy products six to nine months before they hit the shelves, we’ll see these prices start to trickle through in the fourth quarter and really hit

apparel retailers have been doing online. Teen

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Morningstar Advisor - October/November 2010

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