Merchants work on the ground of the New York Inventory Alternate (NYSE) on October 25, 2021 in New York Metropolis.
Spencer Platt | Getty Photographs
Retailers are reporting this week.
Here is the excellent news: The buyer is powerful, and retail steadiness sheets have dramatically improved.
“I’ve been bullish for over a yr,” David Berman, portfolio supervisor at Durban Capital, instructed me. “There may be loads of cash for the buyer, jobs are plentiful, and demand is powerful. Retailers are extra wholesome as a result of retailer rely is down, so there’s a extra rational setting.”
And what about provide chain points? “Retailers have pricing energy and are capable of cross on the upper labor and uncooked materials prices, so gross margins ought to stay sturdy, which is strictly what occurred with House Depot,” Berman mentioned.
Here is the unhealthy information: For some retailers, a lot of the earnings “development” within the final decade has occurred as a result of they’ve changed into “buyback monsters” which have been aggressively shopping for again inventory.
Retailers: buyback monsters?
(share rely discount, since 2011)
- Dillard’s 64%
- Kohl’s 51%
- Hole 38%
- Goal 31%
- TJX 24%
- Walmart 22%
The consequence: Over time, the share rely discount has made retail earnings look stronger as a result of there are fewer shares excellent. In lots of instances, income development has been modest or nonexistent.
Kohl’s, for instance, may have the identical gross sales it had in 2016, however earnings are a lot stronger. Dillard’s may have the identical degree of gross sales this yr as 2018, however earnings are additionally a lot increased.
How does that occur? Partly by way of working extra effectively, so extra of the income circulation by way of to the underside line, but additionally partly by way of fixed buybacks.
Joe Feldman, senior managing director at Telsey Group, notes that retailers are giving shareholders what they need.
“The funding group likes to see buybacks as a result of it makes their shares extra worthwhile,” he instructed me. “It makes traits higher than they in any other case could be.”
Covid interrupted buybacks, however they’ve since resumed
Many retailers, together with Target, Kohl’s and TJX, suspended buybacks during the pandemic, but have since returned to purchasing shares. TJX, for example, repurchased $300 million in stock in the second quarter, which was the first buyback since the first quarter of 2021.
Kohl’s has repurchased shares every quarter from the first quarter of 2010 through the first quarter of 2020, then suspended buybacks for the remainder of 2020 and resumed in the first quarter of 2021, according to Ben Silverman, director of research at InsiderScore.
With cash flow increasing, should companies go back to buying back stock?
“I am not a big fan of buying back stock,” Durban’s Berman told me. “I would rather they increase their dividends.”
Telsey’s Feldman pushes back on the notion that retailers are ignoring investing in their businesses in favor of buybacks.
“The better-quality companies are investing heavily in digital infrastructure and in the supply chain,” he said. “Walmart is spending $13 billion in capital expenditures this year. But you can only do so much. These companies generate so much cash, that buybacks are a way to give something back to the shareholders.”
One thing is for sure: With the consumer flush with cash and inventories tight, don’t look for “half off” sales on Black Friday.
“There may be some modest sales, but you won’t see massive promotions like we saw a few years ago,” Feldman said.
It’s good news for retailers, but consumers might have to get used to some sticker shock.
“There is lots of full-priced selling that is offsetting the higher costs,” Feldman said. “You still want to have some incentives to get people into stores, but right now it’s mostly full priced.”
It’s not all glass half-full.
Investors will be listening carefully for an update on inventories. No one wants to get caught with high demand and no supply over the holidays.
There’s also concern about waning stimulus for consumers, which may figure heavily into spending in the first quarter.
But the big issue is the steadily rising prices, which are a threat to profit margins.
“At some point, you can only push through so much in terms of higher prices before the consumer is going to push back,” Feldman said.
“That hasn’t happened yet, but it will if prices keep going up.”
Telsey Advisory Group (TAG) does not have holdings in any securities covered by TAG. No TAG research analyst has any holdings in any securities covered by the analyst.
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