Has the “Retail” Shoe Finally Dropped?

Last week the US Census Bureau reported retail sales rose 8.2% in April.

For the past year these numbers have been what you might term spectacular. And if you listen to the government squawking on the news, the economy is growing like wildfire.  Look at the last year and you might be tempted to agree… 

Retail Sales Jan 2021-May 2022

Source: Tradingeconomics.com

Above are retail sales since mid-stimmy season and the post-pandemic parole (January 2021).  Across all 16 months the average increase was 18.9% while the median was 16.2%.

Sounds like things should be pretty good.  But here’s a little closer look at reality…

Retail Sales Jan 2018-Dec 2019

Source: Tradingeconomics.com

Average sales growth during this period was only 3.7% (with the median coming in at 3.5%). Those numbers are consistent with past years and are all a long way from the numbers that have been posted in the last year and a half. 

A more important takeaway from the April number would be that sales growth is reverting to the mean… declining from a ridiculous, data-skewing 54% in April 2021.

Retail Pain

That same week, two of the largest retailers in the country — Walmart and Target — released their earnings reports. And boy, were they disappointing. 

Walmart’s earnings were 12% below expectations ($1.30 vs $1.48) while Target’s earnings were a shocking 29% below estimates ($2.19 vs. $3.07).

The market’s reaction to the news was swift and severe…

Walmart (WMT)

Source: Barchart.com

Target (TGT)

Source: Barchart.com

Naturally, corporate honchos tried to make the best of the bad news…

Target’s quarterly report stated very matter-of-factly (my emphasis):

This year’s gross margin rate reflected higher markdown rates, driven largely by inventory impairments and actions taken to address lower-than-expected sales in discretionary categories, as well as costs related to freight, supply chain disruptions, and increased compensation and headcount in our distribution centers

However in the media, CEO Brian Cornell tried to spin things in a slightly more positive light saying the company is “seeing a healthy consumer, but one who is living – and spending – differently while resuming some pre-pandemic habits.”

Diving a little deeper… 

For instance, Cornell said toy sales were a standout in the first quarter and grew by the high single digits as families resumed bigger children’s birthday parties. Luggage sales were up more than 50%, he said.  

On the other hand, sales of items like TVs, kitchen appliances and bicycles dropped off as consumers shifted their spending toward experience-based purchases like booking trips and buying gift cards for restaurants, he said.  

Cornell, however, warned that cost pressures “will persist in the near term,” stressing that some are beyond the company’s control. One of those factors is the price of gas, which hit a national average of $4.523 per gallon on Tuesday, according to AAA.

So while they’re struggling with the same supply chain, transportation and employment issues as everyone else, what they’re conveniently calling “inventory impairments” really means they didn’t anticipate the shift in consumer buying patterns which were skewed during the pandemic lockdowns.

Walmart’s assessment was slightly gloomier where consumer financial health goes:

Walmart Chief Financial Officer Brett Biggs told CNBC that the big-box retailer has seen some budget-strapped customers trade down to the store brand for deli meats and buy a half gallon of milk rather than a full one. 

Elsewhere, the company’s CEO expanded on their consumers struggles by making an important distinction about economic growth (my emphasis):

Along with the drop in general merchandise sales, Walmart is seeing other signs some households feel budget strapped. The average ticket for customers in the U.S. rose 3% due to inflation, but the number of items in baskets has fallen, (CEO Doug) McMillon said on the earnings call.

Read that again… the “average ticket” (a euphemistic way of saying the bottom line of their receipt) increased 3% while the number of items they purchased fell.

This Retail Weakness is Being Felt Everywhere

Walmart and Target aren’t the only retail giants feeling the pain. Costco, one of the largest membership wholesale clubs in the country, has been feeling it as well.

Costco Wholesale (COST)

Source: Barchart.com

And a lot of smaller discount retailers have been getting hit as well. There’s…

Dollar Tree Inc (DLTR)

Source: Barchart.com

Dollar General Corp. (DG)

Source: Barchart.com

Ross Stores Inc. (ROST)

Source: Barchart.com

Big Lots (BIG)

Source: Barchart.com

Burlington Stores Inc. (BURL)

Source: Barchart.com

Three Takeaways From the Retail Shake Up…

There are a couple things to note about this shake up in the retail sector. 

First, what you might call the “good” news: Where Walmart and Target go, neither of these stocks were what you’d call “cheap” going into their earnings report. 

In fact they were priced more like growth/tech stocks. And, as I’ve said before, when you’re priced for perfection, you need to be perfect. The economic conditions in which they’re now trying to operate are far from perfect. So there’s that.

Second, one of the major costs these companies have to bear is employment. And right now these costs are out of whack.

Because they operate on such razor thin margins and manage their costs on the product side so tightly, Walmart’s biggest expense is its labor cost. Boosting staff (and raising pay) during the spread of Omicron, excess employment costs have eaten into their margins even further.

At some point, they’ll have to correct these labor imbalances (or the market will simply balance itself) at which point we’ll see unemployment start to climb. At which point the ruse will likely be up.

Finally, the lies of economic reports like consumer spending and GDP are coming to light. 

The retail sales report is a “current dollar” number that isn’t adjusted for inflation. (Just like GDP.)

That means that while retail consumers are spending “more” they’re actually buying less.

Take Home Depot…

While customer transactions were down 8.2% year-on-year, the home-improvement retailer more than made up for that with an 11.4% increase in the average ticket.  

Get that? Transactions were down, but dollars spent were up.

I noted earlier that Walmart’s CEO made the same observation.

We’ve been living under the shadow of a “fake” prosperity for years now (more on this in coming updates). 

The reality is wages have consistently lagged versus inflation making what was once the middle class all but extinct. Now we’re approaching circumstances under which this ruse can’t be maintained.  

The influx of government cash helped drive prices higher, but now that surge of money is gone (or nearly so) which means overall, people’s means have become a lot thinner — evidenced by the collapse in personal savings to the lowest rate in 14 years…

US Personal Savings Rate

Source: Tradingeconomics.com

Since consumer spending makes up 70% of GDP, I’d say retail has just fired a major warning shot where recession is concerned. 

This will be a critical sector to watch in the coming months…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Confidential