May 23, 2023
Smart (and successful) investors are able to do two things…
First, they do not put an immense amount of trust in government economic reports. I’m not going full “conspiracy theory” here, but there are extrapolations, adjustments, revisions and all kinds of other statistical tweaks that go into calculating the numbers. No reports are carved in stone.
And because they’re not, they also have to be able to “read the tea leaves” so to speak. By that I mean they’re able to see what’s happening in front of them and deduce what’s really causing it — regardless of what the reporting agencies are saying.
For example…
Consumers Ain’t Killing It
Last week the US Census Bureau issued its Retail Sales report.
Retail sales has become a pretty important report these days given that over 60% of our GDP is consumer driven. The more stuff people buy, the healthier our economy appears — on paper at least.
Last week’s report showed retail sales rose 1.6% year-over-year. But that number was down from 2.4% in the previous report. And it was part of a continued decline for eight of the last 9 months.
But in general, it was reported as a positive given that the previous 2 (month-over-month) numbers were actually negative.
I’ve also explained before that the retail sales number isn’t adjusted for inflation.
They want you to believe retail sales looks like this:
But when you factor in inflation, you get a different picture…
The real rental sales number has been flat since March 2021 (the year when inflation started soaring!)
When Consumers Aren’t Spending, Recession’s Impending
I’ve explained before that “recessions” are officially determined by a group called the NBER. (And anyone involved in the health of the economy is doing their level best to avoid the topic.) They analyze the data as they see it and then say, “well, the economy fell into a recession back on X and came out of it on Y.”
The truth is we’re probably in one right now. And here’s how you can “read the tea leaves” on that…
Two of the country’s biggest retailers reported their earnings last week: Target (TGT) and Walmart (WMT). And the reports from each couldn’t have been more different.
Target reported total revenue rose just under 1% at $25.32 billion while Walmart’s revenue rose 7.7% at just north of $152 billion.
Target’s adjusted EPS beat expectations coming in at $2.05 vs $1.76 expected. Walmart beat as well posting $1.47 vs $1.30.
Comparable sales, another important retail metric that tracks stores that have been open for more than a year, saw Target’s sales come in flat while Walmart’s rose 7.4%.
And Target’s net income, i.e. profits, fell to $905 million while Walmart’s rose 4% to almost $97 billion.
The bigger news was both companies’ forward guidance. Target reported:
“We continue to contend with a significant headwind caused by inventory shrink, building on a worsening trend that emerged last year,” said Target Chief Executive Brian Cornell. Target predicts that shrink could reduce profitability by more than $500 million this year, he said.
While Walmart noted:
“…expectations are for Walmart U.S. and International to grow slightly faster than our prior view and for Sam’s Club growth to be consistent with our February guidance.”
Both are well known big box stores, but Target carries a reputation for offering more discretionary goods and trendy brands while Walmart is where shoppers go to get the lowest prices.
That means, when Walmart goes up…
Walmart (WMT) YTD
…and Target goes down…
Target (TGT) YTD
…times are probably about to get tough.
Make the trend your friend,
Bob Byrne
Editor, Streetlight Daily