Consumers spent at a healthy pace during retail’s fiscal third quarter, which ran through the end of October, despite declining stimulus and additional jobless benefits, as well as a peaking delta variation. When compared to the year-ago quarter, the most noticeable takeaway from the time may be the amount of products shops brought in, as inventory growth dramatically outpaced higher sales.
At first glance, it looks that retailers have rebuilt depleted inventories following a sustained period of high consumer demand, indicating that the transportation boom cycle is nearing its end. Walmart’s (NYSE: WMT) and Target’s (NYSE: TGT) comments, among others, that “we ended the quarter in great shape on inventory,” and Target’s (NYSE: TGT) signaling “a strong inventory position heading into the peak of the holiday season,” suggest that the retail sector may have caught up from a nearly year-and-a-half run on most general merchandise SKUs.
However, the increased stock levels this quarter are a little skewed.
Retailers have begun placing orders considerably earlier than usual this year in order to meet predicted record Christmas demand and avoid supply chain disruptions that are causing shipment delays. To do so, the group paid greater freight charges, with some even paying to charter their own container ships to ensure that the goods needed for the year’s busiest shopping season were available.
The inventory moves forward enhanced year-over-year comparisons to depressed inventory positions from a year ago even more.
“As we think about supply from Asia, there’s still some uncertainty,” said Target Chairman and CEO Brian Cornell. “And as we plan for the next fiscal year, we’ll just have to show incredible flexibility and agility to supply the items that our guests want and our system wants.”
Another indicator is that most merchants have yet to participate in any significant promotional or markdown activity, owing to the fact that inventory is still delayed and difficult to obtain. “Full-price selling” has persisted throughout the pandemic, and executives from nearly every chain have stated that the fiscal fourth quarter, which typically sees the largest discounts, will have a restricted amount of offers.
Inventories are also provided in absolute dollars, reflecting price inflation in the mid-single digits, which is factored into the increases. There is inflation in sales comps as well, but several retailers, such as Walmart, have stated that they are willing to absorb some of the higher expenses in order to gain market share. Inflation benefitted inventory growth rates more than sales comps in the end.
Stock levels expanded far faster year-over-year than sales at most major retailers during the first third quarter, according to inventory-sales spreads (the inventory growth rate less the sales growth rate). However, as compared to 2019, there is still a deficit.
There is enough product for the holidays, but replenishing will take a long time.
The inventory-to-sales disparity at Amazon (NASDAQ: AMZN) increased by roughly 20% year over year.
The corporation is pushing holiday shopping early, with some specials starting earlier than usual. The goal is to avoid a late-quarter demand spike that would put pressure on the company’s already overburdened fulfillment and shipping capacities. The company’s major concern continues to be labor difficulties.
Amazon was forced to ship merchandise to locations where the personnel was available to unload it during the third quarter. On Amazon’s quarterly call, CFO Brian Olsavsky noted, “This resulted in less ideal positioning, which leads to longer and more expensive transportation routes.”
Operating costs increased by $2 billion over the period due to labor and productivity headwinds, as well as general cost inflation. According to the company’s forecast, it would incur $4 billion in additional expenditures in the fourth quarter, half of which will be due to wage inflation and the rest to supply chain disruption and higher transportation costs.
Net sales are expected to rise between 4% and 12% year over year, but operating profitability will be slashed in half, to as little as breakeven, due to the additional costs.
“Our biggest capacity restriction in Q3 was labor, not storage space or fulfillment capacity,” Olsavsky remarked.
On a conference call with analysts, Walmart emphasized the inventory increase, which only slightly outpaced sales growth, “in preparation for what we believe to be a great holiday season,” according to CFO Brett Biggs. “The efforts we took to alleviate transit and port delays, including giving orders more lead time, chartering vessels for Walmart items, rerouting delivery to less congested ports, and extended overnight hours at important U.S. ports, have positioned us well.”
Walmart’s fiscal fourth-quarter U.S. sales are forecast to rise 5% despite a difficult comparison.
Target has also been extremely busy placing holiday buy orders far earlier than usual. The company’s inventory increased 17.7% year over year, outpacing revenues by 500 basis points.
On a conference call, COO John Mulligan said, “While we continue to experience some intermittent outages across different commodities and categories, we are entering the holidays with a very healthy inventory position overall.”
It boosted its fourth-quarter forecast, now predicting high-single-digit to low-double-digit revenue growth, up from a high-single-digit gain previously. Despite supply chain challenges, it expects inventory rebuilding to continue through 2022.
Target’s inventory-to-sales spread is still 470 basis points lower than it was two years ago.
The largest rise in inventory in relation to sales was seen at Home Depot (NYSE: HD) (2,200 bps). However, part of the new hires will go into stocking new facilities, such as additional bulk distribution and direct fulfillment centers, as the company expands its same- and next-day delivery coverage to 90 percent of the country. Inventory and sales have both increased at a similar rate over the last two years.
Lowe’s (NYSE: LOW) pushed inventory forward for the holidays, and it’s doing the same for spring shopping. To avoid stockouts, it is storing excess inventory in coastal warehouses. The company’s inventory-to-sales gap increased by 360 basis points year over year as a result of its measures. In comparison to 2019, the metric is still down 1,200 basis points.
“Our attempt to land spring items earlier than usual has boosted our inventory position marginally, and this approach also limits our ability to enhance inventory turns much in the short future,” CFO Dave Denton told analysts.
During the period, Dollar Tree Inc. (NASDAQ: DLTR), the parent company of bargain retailers Dollar Tree and Family Dollar, had a significant increase in its inventory-to-sales gap. However, because past due deliveries is 4.5 times greater than average at Dollar Tree branded stores, the inventory rise includes a significant volume of products still delayed on the water.
According to a press release, the company’s gross margin fell 370 basis points year over year, owing to “mainly higher freight costs.”
“While much of the focus has been on trans-Pacific ocean container rates, we are being impacted by all areas of freight, including higher prices for inland transportation by truck and rail, as well as higher diesel costs,” said CFO Kevin Wampler at a conference call. “In addition, we transported more containers in the third quarter than we had anticipated, necessitating the use of higher-than-expected spot market rates.”
Increased freight expenses, according to management, will cut $2 per share off earnings in fiscal 2021. The current earnings per share guidance for the company is $5.48 to $5.58. In fiscal 2022, it expects to recoup inflation and revert to historical gross margins of 35 percent to 36 percent by raising the price points for its $1 product line to $1.25.
Ross Stores (NASDAQ: ROST) and The TJX Companies (NYSE: TJX) both saw their stock prices rise.
“On the freight front, we’ve adjusted our order in times, chartered our own ocean vessel, and been acquiring at market rate capacity to ensure we have enough ocean freight to convey goods,” Michael Hartshorn, COO of Ross Stores, said on the company’s quarterly call.
Due to rising domestic and ocean freight costs, the actions put 160 basis points of gross margin pressure on the company.
Ross Stores’ inventory-to-sales gap improved by 1,500 basis points year over year, but the company is still running a 1,600 basis point deficit compared to the same period last year.
The TJX Companies, which owns T.J. Maxx, Marshalls, and HomeGoods, incurred 160 basis points of additional freight expense in the third quarter as it prepared for the holiday season. The number is expected to rise by another 80 to 90 basis points in the fiscal fourth quarter, which has experienced sales growth in the mid-teens so far when compared to the same period in 2019.
Consumers were buying general products and household goods over clothing well into the epidemic, thus garment recovery trailed behind the broader retail revival. In addition, several of the group’s stores have been rightsizing items and cutting vendor lists to correspond with winning brands, adding to inventory shortages.
“Extended transit times have had an impact on our business, resulting in inventory receipt delays and dramatically greater transportation expenses,” stated Michelle Gass, CEO of Kohl. “The most evident proof of this is our inventory level at the end of Q3, which was down 25% year over year.”
Kohl’s (NYSE: KSS) started the year with a goal of reducing inventory to boost profits and inventory turns, but “our levels remain below that original objective,” according to Gass. As items stuck in transit are “up rather dramatically,” inventory available for sale remains low, particularly in Kohl’s women’s collections.
Kohl’s inventory reductions, while partly purposeful, have resulted in stock levels behind sales by 1,450 basis points this year and 2,500 basis points over the last two years. “Our ability to rebuild inventories to desired levels continues to be hampered by industrywide supply chain problems,” Kohl’s CFO Jill Timm told analysts.
“We’re well-positioned for the holiday season,” Gass said, adding that “new receipts are continuing to flow to fulfill anticipated client demand.” Sales are expected to grow in the low double digits in the fourth quarter, while gross margins will be pushed by 350 basis points compared to 2019. Higher freight prices, surcharges, and e-commerce fulfillment fees account for the majority of cost pressure.
Retail sales and inventory statistics from a wider range of retailers indicate the same picture.
According to the most recent Census Bureau data, the merchants’ inventories-to-sales ratio continues to sway towards the bottom. In September, the metric was at 1.09x, down for the second month in a row after hitting a new low in April. It has been essentially rangebound since then (1.07x). Retailers have just enough inventory on hand to cover a month’s worth of sales, according to this statistic.
Prior to the pandemic, the ratio was roughly 1.45x.
Retail and foodservice sales grew 1.7 percent on a seasonally adjusted basis from September to October, and were 16.3 percent higher year-over-year, according to Census Bureau data. As consumers got a head start on holiday shopping, those growth rates climbed 90 basis points and 200 basis points, respectively, from September’s rises.
The National Retail Federation reported that core retail sales, which exclude sales from auto dealers, gas stations, and restaurants, increased by the same amount sequentially in October and were 10.8% higher year-over-year.
The report’s “statistics demonstrate that customers are getting a head start on their holiday shopping,” according to Matthew Shay, president, and CEO of the National Retail Federation. “We continue to encourage consumers to shop early and shop securely, and we fully anticipate a record-breaking holiday season.”
Sales are expected to rise 8.5 percent to 10.5 percent year over year over the Christmas season, which the group defines as all of November and December. According to a recent survey done by the organization, 46 percent of customers polled began their holiday shopping earlier than usual, with 28 percent of their anticipated holiday spending completed by early November.
Core retail sales are expected to rise between 10.5 percent and 13.5 percent year over year to $4.5 trillion in 2021, according to the NRF’s full-year prediction.
Even if year-over-year comparisons decline, freight continues to move at near-record levels.
There’s no indication of a break in the action… yet.
People are reentering employment, and the consumer appears to be robust and willing to buy. China’s manufacturing has largely resumed after firms were forced to close due to power disruptions caused by coal shortages.
According to the National Retail Federation’s container projection, production of twenty-foot equivalent units will continue at an all-time high.
In comparison to last year’s high volumes, November and December are expected to rise by more than 3%. The group’s monthly forecasts are completed by January (+7.6%), February (+7%), and March (-4.1%). Even if container flows decline year over year, they will still be in comparison to what will be a record in 2021 — 26 million TEUs, up 17.9% from the previous year.
Consumers’ wallets will tighten at some time, easing freight demand and supply chain bottlenecks.
As the COVID-related stimulus, enhanced unemployment benefits, and sign-on and merit bonuses expire in 2022, spending will confront challenging comparisons. According to Commerce Department data, the personal saving rate has already retreated to pre-pandemic levels as artificial income sources dissipate. The personal saving rate soared above 30% at the start of COVID as stimulus dollars began to flow and consumers couldn’t go out and spend them due to lockdowns.
While the macroenvironment hunts for the new normal for next year, the inventory replenishment/freight cycle appears to have a long tail. Consumer demand hasn’t slowed, merchandise inventories are still historically low, and new transportation capacity isn’t expected to come online until 2022, implying that existing freight market fundamentals will likely last until then.
