To The Moon

Why retailors' performance polarized this quarter?

Good inventory management, Less elastic customers, Higher cost management abilities make Macy/JWN performs better. 

The inflation makes more customers to money-saving supermarkets.

Retailers, as the direct connection between producers and consumers, are also the most sensitive in changes on supply and demand. However, $SPDR S&P Retail ETF(XRT)$ is the last three on $S&P 500(.SPX)$ YTD. Investors are facing increasing fears of a recession.

How did retailers performed?

Most stocks dropped a double digits since the year. $Wal-Mart(WMT)$ and $Costco(COST)$ lost almost 20%, with $Target(TGT)$ reaching almost 30%.

Only two companies record positive return, the lowest polar $Dollar Tree(DLTR)$(15.9%) and highest polar of $Nordstrom(JWN)$(9.7%)

The profit level is highly related with the performance after earning. The correlation coefficient between stock price change and profit surprise reached 0.5, while revenue surprise was only 0.1. In other words, investors are more concerned about profit indicators. It is also consistent with the current tight environment and risk-off attitude.

Where are the bad performance from?

We believe that supply chain management is an important factor.

It is also obvious that, companies' profits are sufferring with fast inventory growth. Due to the continuous control of the supply chain last year, retailers are panic to replenish inventory, made the price of raw materials rises further. In the second half of the first quarter of 2022, a decline in demand exceeded retailers' expectations, and the inventory suddenly exceeded the actual demand, so they had to cut prices to destock while taking upstream inflatio. It made a substantial damage to their profits.

Let's take from consumers, both the high end and low end are performing better than the most big ones.

High-end department stores performed better.$Nordstrom(JWN)$ stood out in its week, while $Macy's(M)$ rebounded to previous level a following week. These two companies have both their revenue and profit beat and raised the guidance for the next quarter, which greatly increased investor confidence. However, the operating level of $Kohl's(KSS)$ ended up with slightly lower, it's being acquired, stock price changes with uncertainty.

Besides, an important reason for the good performance of high-end supermarkets is that their costomer groups are less flexible and insensitive to price increases.

The mid BIG ONES suffer. WalMart and Target had problems in supply chain management and headcount management at the same time. The profit of this quarter was unexpectedly much lower than expected, and the guidance for the next quarter was lowered at the same time, which meant that the current problems could not be solved quickly. These two companies are industry heavyweights, and a large number of institutions have heavy positions, so the sharp drop brought by them has brought a lot of trouble to the whole sector. Please interpret it in detail Click to Review Walmart's record plummet means a lot, Here's the reason

Cost-saving stores is different, and performed mixed. One of the most important reasons is that this kind ofLow-priced supermarkets are sensitive to costs and profits, and their supply chain management has always been stricter. 

Among them,$TJX Companies(TJX)$,$Dollar General(DG)$Give up some sales growth opportunity and optimize profits through inventory optimization and online transformation;$Dollar Tree(DLTR)$The "One Dollar Store" trademark contributed to revenue and profit margin by successfully raising the price to $1.25; And$BJ's Wholesale Club Holdings Inc.(BJ)$Such wholesalers have increased the acquisition and optimization structure of distribution network. In addition,Rising inflation has also reduced consumers' purchasing power, shifting some of the spillover demand to cheaper goods.

And$Costco(COST)$, its membership system helps to increase user stickiness. private domain is easier to deep operation. This is similar to Wal-Mart's Sam'Club, which performed better than other parts.

Which retail categories have the greatest impact?

The impact of online retailing in the worst period of the epidemic is relatively small, so the rebound after gradually liberalizing control in the second half of 2021 is relatively small. And Offline retail has obviously grown rapidly after the liberalization of control, But this trend came to an end after March this year.

With the continuous inflation, consumer demand also decreased. According to the increase of transaction amount in US dollars, retail goods have entered negative growth since March, which also confirms that "the deterioration in the second half of the quarter exceeded expectations" mentioned by Wal-Mart executives.

Subdivided into specific consumer goods, andOffline recovery topics are obviously better. For example, office supplies.

Clothing as a whole is declining, but work-related uniforms are rising against the trend year-on-year, because more and more people return to work offline;

The double-digit decline in sports goods may be due to a high base during the Olympics this time last year. But also give$Nike(NKE)$$Under Armour Class A(UAA)$Sports brand brings certain crisis;

Second-hand goods are particularly strong. Although the year-on-year growth has dropped from double digits to single digits, inflation has been growing positively since the beginning;

The consumption of household appliances has dropped sharply, mainly due to the reduction of consumer demand, and some of them are also affected by the oversupply of supermarkets;

Home sales growth is relatively stable year-on-year, lower than last year, and the growth is more obvious in the sales of office supplies.

Among offline entertainment products, handicrafts, music, books, medical beauty, jewelry watches, etc. all declined to varying degrees, while the sales of greeting cards, gift boxes, pets and other products used for offline activities still increased, which also maintained the competitiveness of discount stores to a certain extent.

Among daily foods, bread, milk, meat, etc. still maintain a certain growth, but the growth rate has declined, mainly because on the one hand, the price of food increases, on the other hand, the demand decreases, and the transaction volume decreases, but the price increase factor may have a greater impact. The only decrease is beverages (including alcohol), which may be due to the liberalization of control, so that fewer and fewer people can entertain at home, which will also give a warning to the streaming media industry.

However, daily offline catering is still growing and the overall growth rate is relatively high, but compared with before, the growth rate has also declined.

Therefore, through the financial report of retailers exceeding this quarter and the recent retail consumption data, different supermarkets are facing different situations. The problems faced by comprehensive supermarkets such as Wal-Mart and Target may not improve in the short term, which is the so-called ship is difficult to turn around. But in any case,The requirements of supply chain management and cost management will become higher and higher, and investors will still be sensitive to profits.

From the current valuation level, Macy's has become the company with the lowest valuation multiples after this battle.