Traders on the floor of the New York Stock Exchange.
Retail profits have never been better, but the Delta variant remains the wild card.
In theory, this is a golden moment for retailers who start reporting their earnings this week.
Consider the following:
The consumer is flush. The American consumer has never had more available cash or more free time than last year.
There is commodity inflation, but most retailers can pass the higher costs on. Since the consumer is flush, there is less resistance to higher prices.
There is an imbalance between supply and demand. Demand for most goods is high, but supply is low as supply chains have been disrupted. The stocks are low.
There is very little on offer. Retailers can sell more goods at full price. That helps the profit margins.
The big wild card is the Delta variant
The market trades on the story that the economy will continue to open, but the delta variant means consumer behavior could change quickly.
The key test is back at school. A strong back-to-school season is good for retailers and usually implies good Christmas sales. Look to the south where schools open too early.
Market share and margins are the most important issues
Two important questions to ask when retailers start reporting their earnings:
How does the development from 2019 to 2022 look like? 2020 is not a good year to compare; Investors will want to know how 2022 will fare against 2019.
Can the margins stay high? Higher revenues and lower costs have improved margins significantly, but inflation could be a bigger headwind than some expected.
For Joe Feldman, who follows retail as senior managing director at Telsey Group, this is the biggest problem: “The consumer is willing to spend, but I am concerned about the cost side of things,” he said. “You are nervous about freight and labor costs. How much can you pass on?”
Will the winners still be winners?
The big winners of this year’s retail competition are the trio of “supersellers” (Walmart, Costco, Target). Consumers know they can get almost everything they need from these three retailers, and they are likely to take market share from others. Sporting goods and a small group of specialist retailers continue to benefit from athleisure and home (Lululemon, Crocs, Deckers).
“Superseller” in retail
Costs increased by 19%
Walmart increases 4%
Other sectors to watch out for include:
Home improvement: The “peak demand” theory – that home improvement has peaked as more people go out – makes sense, but traffic at Home Depot and Lowe’s still seems heavy. The wood inflation that helped Lowe’s and Home Depot in the first quarter is not going to be of any help now. The Delta variant can force more people to stay home.
Home textiles – Previous winners: Ethan Allen and Williams-Sonoma significantly outperform the broader market, but are below their highs earlier in the year.
Super Market: They won during the pandemic, but how much business did they keep? Grocery Outlet recently issued disappointing guidance. Is the business more fleeting than expected?
Department stores: Beaten up last year but too early to say if she’ll recover. Macy’s and Nordstrom were big movers in the first quarter and have been largely moving sideways since then. To the extent that the Delta slows economic recovery, it is a disadvantage for shopping malls.
Cabbage is up 35%
Macy is up 70%
Nordstrom up 17%
Clothing / cosmetics – a real wildcard. The delta variant comes at an inopportune time to start school. The bull case was that once everyone was vaccinated, everyone went out and bought clothes and cosmetics. But the variant raises doubts: is everyone going to this indoor wedding? Does everyone refresh their wardrobe to get back to work? Or are you returning to social activities? The delta variant has meant that everyone is less sure of their work plans and social plans. The immediate need to replace that wardrobe may diminish. A shining sign: Cosmetics giant Ulta Beauty has been an outperformer lately.
Urban Outfitters up 50%
Underarmament increased by 45%
Gap by 45%
Capri stocks up 42%
Best buy-up of 14%
Ulta Beauty up 28%
Seal jewelers up 151%
AutoNation up 66%
Conclusion: There was a lot of optimism in the first quarter. This will continue, but it will likely be tempered.
“The numbers for the second quarter will be okay, but they will likely be more cautious for the second half of the year. The delta variant could delay the recovery.” said Feldman of Telsey.