Macy's and Kohl's are raising clothing prices to protect profits. Investors see that as a big win.

• A round of retail earnings revealed a divide between the retailers that are trying to keep prices low for customers and those that passing on higher costs.
• Big-box chains Target and Walmart were punished by investors after delivering third-quarter earnings reports, despite the results topping analysts' expectations.
• While shares of department store operators Macy's and Kohl's, TJ Maxx owner TJX and lingerie retailer Victoria's Secret rallied as the companies raised prices and kept inventories tight.

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A round of major retail earnings this week revealed a stark divide in the industry between the retailers that are trying to keep prices low for customers amid rising inflation, and those that are able to pass on costs to shoppers this holiday season.

Big-box chains Target and Walmart were punished by investors after delivering third-quarter earnings reports, despite the results topping analysts' expectations. Both have adopted a strategy that largely entails absorbing some of the rising costs of shipping, labor and materials rather than raising sticker prices. Both businesses cited the need to uphold a reputation for value.

"That's our purpose," Walmart CEO Doug McMillon said in an interview with CNBC's "Squawk on the Street." "We save people money and help them live a better life. Those are the words that came out of [Walmart founder] Sam Walton's mouth. He loved to fight inflation. So do we."

Walmart shares fell 2.6% on Tuesday in the wake of its results. Target shares tumbled 4.7% Wednesday, the day it reported. Walmart's stock is now slightly down year to date, while Target's is holding on to a gain of about 43%.

But if you're in the business of selling a lot of apparel, it's a different story. Shares of department store operators Macy's and Kohl's, TJ Maxx owner TJX and lingerie retailer Victoria's Secret rallied as the companies touted their pricing power to Wall Street and reported leaner inventories.

Macy's shares jumped 21% on Thursday, at one point hitting a three-year high of $37.95. Kohl's shares rose more than 10%, while Victoria's Secret shares climbed nearly 15%. TJX's stock hit a 52-week high of $76.94 on Wednesday.

"Everyone got all concerned about supply chain and inflation," said BMO Capital Markets analyst Simeon Siegel. "But that literally is the same thing as tight inventory and higher prices."

"Each of these stock pops represents that recalibration back from concerns around inflation into excitement around low discounting," Siegel said.

Macy's says it's give and take

All retailers are navigating an environment where costs of everything from fuel to labor are climbing. Inflation hit a three-decade high in October. The consumer price index — which includes a mix of products ranging from gasoline and health care to groceries and rents — rose 6.2% year over year, the most since December 1990.

Some categories have seen a bigger uptick than others, though. Food prices, for example, grew by 0.9% in October — with meat, poultry, fish and eggs collectively increasing 1.7%. Apparel prices remained flat.

Macy's, which is primarily an apparel destination, said it has been running tests over the past three months to see which categories of goods consumers are more price sensitive toward and where shoppers are more willing to shell out a few more bucks.

"We've clearly been through these inflationary cycles before, and so we have a lot of experience with it," Macy's Chief Executive Jeff Gennette said in an interview. "And with fashion, sometimes you can pass that on, and you can get a higher ticket and a higher sale price."

In some instances, though, Gennette said that Macy's faces a "price ceiling" for commodity items such as a basic T-shirt or a pair of denim jeans. "In some cases, we hold the retail and we take the higher costs and we take a shorter margin," he said.

Another weapon that Macy's has in its arsenal is lean inventories, said Gennette. That means it won't have to discount surplus goods that aren't selling. Macy's inventories in the three-month period ended Oct. 30 were up more than 19% compared with year-ago levels, but they were down over 15% on a two-year basis.

Earlier in the week, bloated inventories at Target and Walmart were a red flag for investors. In part, these companies were being proactive to make sure shelves were well-stocked for the holidays — and that could pay off if shoppers rush into stores in the coming weeks eager to spend. Walmart said its inventories are up 11.5% ahead of the holiday season. Target's inventories were up nearly 20%, or $2 billion, year over year.

"Retailers don't want to scare off a consumer," said Naveen Jaggi, president of commercial real estate firm JLL's retail advisory services. "They're willing to manage their costs and take on the price of the sale because they don't want to take the motivation away from buying a product."

But if people don't show up, or if they show up to Target and Walmart looking for something else that isn't stocked, that bloated inventory could be marked down come January.

Notably, Gennette said that when Macy's does employ markdowns, it is discounting at a local level rather than a regional level. So the same shirt in one Macy's store in Los Angeles might be less expensive than another five miles down the road, he said.

Kohl's sees shoppers eyeing premium brands

At Kohl's, CEO Michelle Gass said its customers have gradually been gravitating toward higher-end goods, as the retailer changes up its merchandise assortment. She cited Nike and PVH-owned Tommy Hilfiger as two examples of more premium brands at Kohl's that fetch bigger prices.

"We still have those great promotions, but less of them, so that it's simpler — especially for our new customers," Gass said in an interview. "We've got sophisticated tools now on elasticity."

Like Macy's, Kohl's has also tightened its grip on inventory, which was down 25% on a two-year basis at the end of the third quarter.

Jefferies analyst Stephanie Wissink said Kohl's profit margins are improving thanks to its current inventory position as well as the pent-up demand environment, allowing the company to sell more goods at full price.

Victoria's Secret has also been selling more of its bras and underwear at higher price points, thereby boosting sales. Revenue in the third quarter rose 7% to $1.4 billion from $1.35 billion a year earlier. Its inventories ended up 4% compared with last year, and down 16% compared with 2019.

TJX CEO Ernie Herrman told analysts on an earnings call Wednesday that the off-price chain hasn't seen any pushback from consumers over prices going up, either.

"We thought there would be a handful of items here or there that we would run into challenges with, but that has not been the case," he said.

TJX's comparable store sales for the quarter ended Oct. 30 rose 14% year over year, while its net sales climbed 24% to $12.5 billion. Its inventories were up slightly at $6.6 billion, compared with $6.3 billion two years earlier.

—CNBC's Melissa Repko contributed to this report.

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