Has the Pandemic Prompted Inventory Discipline in Retail?

For decades, the holiday season has been synonymous with steep discounts and consumer bargains. But this year, as we begin to crawl out of the pandemic, things might look a little different for your average shopper. The sales we have seen in the past will be gone, replaced by much more modest offers, according to Mari Shor, a senior equity analyst at Columbia Threadneedle Investments.

That’s because, during the pandemic, disrupted supply chains forced many retail companies to shrink their inventories and carefully watch their supplies. “They were managing inventory very tightly, which allowed them to pull back on promotions and markdowns, which in effect raised prices across the board,” Shor said.

Shor says this rise in prices may have benefited some retail companies in terms of their gross margins. Thus, even now, as supply chains have gone back to normal in some industries, she still expects many companies to move forward with their pandemic pricing levels.

“Their recent experience is giving them the confidence to say that they do have pricing power, and they will continue to take price strategically,” Shor said.

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Despite this price increase, many analysts still forecast success for the retail industry. The consulting firm Deloitte has predicted that holiday sales will increase by 7% to 9% this year, and ecommerce sales in particular will rise a projected 11% to 15% year over year.

While consumers might find the lack of sales frustrating, it could be a potential opportunity for investors. “I see the most upside in some of the recovery names where the stocks have pulled back, especially in beauty and handbags and traditional apparel,” Shor said.

She also sees potential opportunities in European luxury goods. “They are not as exposed to supply pressures as some of the US brands that are sourced in China,” Shor noted. Luxury bags have seen stark price increases this year, with major brands such as Louis Vuitton and Chanel announcing both announcing price increases for many of their items. The price of one of Louis Vuitton’s most popular bags went up by 25% in the spring.

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Tags: Columbia Threadneedle, consumer, Holiday Season, Luxury, retail, Supply

In a move to shore up its alternative asset capabilities, investment management firm Franklin Templeton has agreed to pay $1.75 billion to acquire Lexington Partners, a manager of secondary private equity and co-investment funds. Franklin Templeton said the acquisition will complement its real estate, private credit, and hedge fund strategies as investors increasingly allocate capital to alternative assets.

“This acquisition will position us to capitalize on the highly sought-after secondary private equity market,” Jenny Johnson, president and CEO of Franklin Templeton, said in a statement.

Founded in 1994, Lexington has 35 partners and principals, and assets under management (AUM) of $34 billion. It says it has raised more than $55 billion in aggregate commitments from over 1,000 institutional investors. The firm is currently investing from its $14 billion flagship global secondary fund, its $2.7 billion middle market secondary fund, and its $3.2 billion co-investment vehicle. Lexington also invests in private investment funds during their initial formation.

Lexington has eight offices, located in New York; Boston; Menlo Park, California; London; Hong Kong; Santiago, Chile; São Paulo; and Luxembourg. Once the deal closes, which is expected to occur by the end of the second quarter of 2022, Franklin Templeton said it will have alternative AUM of approximately $200 billion.

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Under the terms of the deal, $1 billion of the $1.75 billion price tag will be paid at the closing of the deal, and additional payments totaling $750 million will be made over the next three years. Lexington will operate as a specialist investment manager within Franklin Templeton, and its current management team will maintain their roles post-transaction. Lexington’s partners and employees will also be granted a 25% ownership stake in Lexington, vesting over five years, and $338 million in performance-based cash retention awards to be paid out over approximately five years.

“This transaction provides for long-term continuity and stability for our investors, management team, and employees,” Wil Warren, president of Lexington, said in a statement.

Warren, who is also co-chair of Lexington’s secondary investment committee, has been with the firm for 27 years, managing its investment operations and overseeing the secondary and co-investment funds. Prior to joining Lexington in 1994, Warren was an associate at Landmark Partners, and before that he was an analyst in investment management at LaSalle Partners.