Merchants on the ground of the New York Inventory Change.
Retail earnings have by no means been higher, however the delta variant stays the wild card.
In concept, it is a golden second for retailers, which start reporting earnings this week.
Contemplate the next:
The patron is flush. The American shopper has by no means had extra disposable money or extra leisure time than previously 12 months.
There’s commodity inflation, however most retailers can go on the upper prices. As a result of the patron is flush, there may be much less resistance to increased costs.
There is a provide/demand imbalance. Demand for many items is excessive, however provide is low as a result of provide chains have been interrupted. Inventories are low.
There’s little or no on sale. Retailers can promote extra items at full worth. That helps revenue margins.
The large wild card is the delta variant
The market is buying and selling up on the narrative that the financial system will preserve opening up, however the delta variant means shopper conduct might change shortly.
The important thing take a look at is again to high school. A powerful back-to-school season is nice for retailers, and often implies good vacation gross sales. Look to the South, which has early faculty openings.
Two key questions as retailers start to report earnings:
What’s the trajectory from 2019 to 2022? 2020 isn’t a very good comparability 12 months; buyers will wish to know the way 2022 goes to stack up towards 2019.
Can margins keep excessive? Greater income and decrease prices have considerably improved margins, however inflation could also be an even bigger headwind than some anticipated.
For Joe Feldman, who follows retail as senior managing director at Telsey Group, that is the most important problem: “The patron is able to spend, however I’m fearful about the associated fee aspect of issues,” he mentioned. “They’re nervous because of freight bills and labor prices. How a lot can they go on?”
The large winners within the retail sweepstakes this 12 months are the trio of “tremendous sellers” (Walmart, Costco, Target). Consumers know they can get almost everything they need at these three retailers, and they are likely taking market share from others. Sporting goods and a small group of specialty retailers have continued to benefit from athleisure and at-home (Lululemon, Crocs, Deckers).
Retail “super sellers”
Target up 48%
Costco up 19%
Walmart up 4%
Other sectors to keep an eye on include:
Home improvement: The “peak demand” theory — that home improvement has peaked now that more people are going out — makes sense, but traffic still appears strong at Home Depot and Lowe’s. Lumber inflation that helped Lowe’s and Home Depot in the first quarter will not be a help now. The delta variant may or may not force more people to stay at home.
Home furnishings — winners so far: Ethan Allen and Williams-Sonoma are significantly outperforming the broader market but are off their highs earlier in the year.
Grocery stores: They gained during the pandemic, but how much of business did they retain? Grocery Outlet recently gave disappointing guidance. Is business more transitory than expected?
Department stores: Clobbered last year, but too early to say whether they are bouncing back. Macy’s and Nordstrom were big movers in the first quarter and have essentially been sideways since. To the extent delta slows the recovery of the economy, that is a negative for malls.
Kohl’s up 35%
Macy’s up 70%
Nordstrom up 17%
Clothing/cosmetics — a real wild card. The delta variant is coming at bad time for back to school. The bull case was that once everyone was vaccinated, everyone would go out and buy clothes and cosmetics. But the variant has cast doubt on that: Is everyone going to that indoor wedding? Is everyone refreshing their wardrobe for back to work? Or going back to social activities? The delta variant has made everyone less certain about their work plans, and their social plans. The immediate need to replace that wardrobe may be lessening. One bright sign: Cosmetics giant Ulta Beauty has been a recent outperformer.
Urban Outfitters up 50%
UnderArmour up 45%
Gap up 45%
Capri Holdings up 42%
Best Buy up 14%
Ulta Beauty up 28%
Signet Jewelers up 151%
AutoNation up 66%
Bottom line: There was a lot of optimism in the first quarter. That will continue, but it will likely be tempered.
“Second-quarter numbers will be fine, but they will likely be more cautious about the second half of the year. The delta variant may delay the recovery.” Telsey’s Feldman said.