Tim Hoyle, CFA, Chief Investment Officer
thoyle@haverfordquality.com

Retailers Report Good Tidings for the Holiday Season

Source: Don Landren, USA Today

Many major retailers reported quarterly earnings last week and provided guidance on how they expected consumer spending and supply chain woes to affect the all-important holiday season. What they said provided more evidence in the growing dichotomy between Main Street and Wall Street. In this case, we are defining “Wall Street” as the big box retailers versus the typical small business along Main Street. It appears corporate America is navigating issues of supply chain, inflation, and employment well enough to meet investor expectations. In fact, these headline risks have given companies the ability to raise prices on consumers who still appear flush with cash in the post-pandemic economy.

Below are several noteworthy excerpts from retailers’ earnings calls that provide some insight into how these companies are navigating the current environment. I also want to highlight the great job Maxine Cuffe did on last week’s Havercast discussing temporary vs. systemic inflation drivers. She pointed out that port congestion and snarled supply chains are almost certainly temporary. Just yesterday, The Wall Street Journal published an article worth reading on that subject: Supply-Chain Problems Show Signs of Easing.1

On the issue of inventories headed into the Christmas shopping season, Home Depot said: “we’ve received most of the goods for Q4, but there is still product…parked outside L.A. Long Beach, and we track our containers on those ships. So, we’re not too terribly concerned. There aren’t huge amounts, but there is [some] Q4 product still working through the supply chain.”

Home Depot’s inventories are up over 20% versus this time last year. Dollar General reported “merchandise inventories were $5.3B at the end of the quarter, an increase of 20% overall and 13.7% on a per store basis.” Despite the uncertainties, Dollar General was able to increase their sales and earnings guidance.

Inventories at Lowe’s did not increase as much, up only 6%. However, they are very confident in their position. “As one of the largest importers in the U.S., we are fortunate to be able to leverage our scale and carrier relationships to secure shipping and transportation capacity and work to minimize the impact of cost increases. We’re also taking a very proactive approach by ordering inventory earlier than in years past, including our seasonal buys for both 2021 and 2022. We expect that the supply chain issues are going to continue into 2022. Some categories are much better, some categories persist. But I think overall, we’ve got a great handle on how we’re mitigating that through all of our tactics.”

At Starbucks, they “made significant progress addressing supply chain issues and experienced an overall improvement in inventory availability as we moved through the quarter by increasing production at existing suppliers, onboarding new suppliers, and strategically prioritizing key holiday and Q1 merchandise.” I hope these improvements find their way to the Devon Starbucks!

Beyond supply chain issues and inventories, the Devon Starbucks is also suffering from a dearth of employees. “Approximately 70% of our hourly partners are new to Starbucks. And we continue to make investments in them from a training standpoint.” Last week Starbucks announced plans to raise average wages to $17 per hour. Macy’s announced, “we are also raising our minimum wage rate to $15 an hour, which will be in effect nationally by May of 2022. This will increase our average total pay for hourly colleagues to about $20 an hour.”

For the most part, every retailer shared the same message. Demand is strong, supply chain problems are surmountable, and good workers are hard to come by, even after raising wages. Hopefully, everyone will be able to enjoy Thanksgiving free from the stress of consumerism and keeping up with the Jones’ new car purchase. There will be plenty to purchase, and plenty of time to do the purchasing in the weeks ahead.

Walmart’s statement sums it up: “We’re off to a good start for the holiday season and in good position to continue delivering strong results. Despite the various macro and industry challenges, our inventory position is good. Stores and fulfillment centers are well staffed and our price position remains strong. Customers should expect to find the items they want at great values and we are ready to serve them however they want to shop.”

1 https://www.wsj.com/articles/supply-chain-problems-show-signs-of-easing-11637496002?st=1wggc9pl9iuowwt&reflink=desktopwebshare_permalink