Investors breathed a sigh of relief after the recent retail earnings season, when reports weren’t as bad as feared. Maybe they should still be holding their breath.
(GPS), many retail stocks got a boost of their quarterly reports in August. The market was quick to cheer on companies that were able to do better than expected despite selling products from clothing to consumer electronics that quickly fell out of favor with buyers.
However, one thing all of these companies have in common is that they cleared a bar that they themselves had downloaded only a few weeks before. Additionally, many retailers are still struggling with the high inventories that caused so much damage in the first place, with profits dragged down by higher supply chain and transportation costs, as well as deep discounts for moving excess merchandise.
That’s not a good position to be in at a time when high inflation is erasing wage gains and eating into Americans’ savings, while banks begin to raise their credit standards and consumer confidence is lacking. For retailers, that could make this earnings season a quarter respite.
“Overall, we see a demand-driven recession late this year or early next year,” says Chris Senyek, chief investment strategist at Wolfe Research. “Consumers are simply running out of power.”
You wouldn’t know that by looking at retail stocks. In August, the
(XRT) was down just 0.3%, outperforming the
(XLY), which fell 4.5%, the
(XLP), which decreased by 1.9%, and the
which fell 4.2%.
That outperformance came after sentiment turned sharply bearish heading into earnings season. In other words, for investors preparing for the worst, not great was okay.
Take Best Buy, they went up on their second quarter earningswhich reported a profit of $1.54 per share, beating expectations by 27 cents, even as sales at stores open for at least 13 months fell more than 12%: “The best thing that can be said about Best Buy’s results is that were no worse than expected, which for retail names, has been good enough this summer…[but even] Within the context of low expectations, Best Buy’s second quarter results and guidance for the subsequent half were mixed,” summarizes Michael Baker, an analyst at DA Davidson. And he is a bull.
Best Buy isn’t alone either. Walmart is trading higher than it was at the end of July, before announcing that earnings would be 10% lower for the full year. While it has outperformed in other tough economic times, it is trading at around 21 times future earnings, meaning investors are willing to pay more for it now than before it cut its outlook, even as the picture of the consumer is clouded.
Still, that may speak more to Walmart’s defensive characteristics and relative safety at a time when things seem to be going against the industry. Or the fact that during his earnings call he said he canceled billions of dollars in orders to control his inventory.
In fact, that may be the key metric, says Senyek, who notes that retailers are likely to overorder not just for the quarter that ended, but perhaps into the end of the year. “Inventories don’t lie,” he says. “We could see a double whammy during the holiday season [as consumer] demand slows down.
His own research points to a number of discretionary companies that have seen their days of outstanding inventory rise significantly quarter-over-quarter and year-over-year, and span the revenue spectrum, with
(CPRI), Carter (IRA), Ralph Lauren (RL),
Ollie Bargain Outlet
(HBI) and Five Below (FIVE) round out the top 10.
(PTON) ranked 12th, it is no surprise to anyone who has followed the former star who fell after his fiscal fourth quarter results In the past week. It was the only retailer to see its days of inventory increase by more than 100 from the prior year quarter.
However, there was one company on the screen that stood out, the only one with triple-digit increases both quarterly and year over year, and it wasn’t a retailer.
(OLED) days of inventory increased 113 and 158, respectively.
Part of that is due to the fact that display companies historically carried more inventory than many others. But it also speaks to the fact that the slowdown in consumer demand is not limited to the T-shirts left on the Gap shelf, but also to Universal Display’s end markets, from tablets to TVs. That has been on display at semiconductor results also, as the sector has been competing with retail in terms of pessimistic orientation.
“It’s not much different at a high level from what happens in retail,” Senyek says.
The summer lease is too short, and for retail stocks, the August reprieve could be gone along with the season.
write to Teresa Rivas at [email protected]