US Retailers in Need of Some Therapy

By Glenn Dyer | More Articles by Glenn Dyer

Ahead of Thanksgiving on Thursday and the Black Friday start to America’s huge end-of-year selling season, it was a miserable week for America’s second tier retailer with poor sales and earnings reports seeing dramatic falls in share prices ranging from 14% to 29%.

The weakness was a surprise, especially given earlier solid reports from bigger retailers and the underlying health of the US economy.

Last week it was America’s retail giants like Target, Walmart, Home Depot and Lowes Cos that produced the goods in reporting better than expected quarterly results and optimism about the next quarter or so and early 2022.

All four biggies – Home Depot and Lowes are America’s Bunnings – Walmart and Target dominate the mid to lower levels of retailing in household goods, clothing footwear and food.

On top of these reports, department store chains like Macy’s and Kohl’s also surprised on the upside.

If anything it is the ability to ride through the inflation and logistics hiccups that is separating US retail outperformers from the rest and the current selling season that kicked off late Thursday, Sydney time, will not save some of the stragglers from a miserable 2021.

But for the giants it could very well end any pretensions that mid-range and smaller chains can be a future threat.

The weak reports all had common themes of poor decisions on stocks, not enough money to finance extra inventory or the clout to elbow their way out of supply chain snafus that the likes of Walmart and target are doing.

The US economy is much stronger than Australia’s – consumer spending and retail sales are rising, jobless numbers falling, output is solid – and all this good news is despite tens of thousands of Covid infections being reported every day.

Inflation (as we saw on Wednesday with the US Fed’s favourite measure now at 5%) is a concern, so are rising oil and petrol prices, car prices remain volatile and product availability varies from store to store within man chains – but not the megachains.

But in the three days leading up to Thanksgiving, no such joy for investors in the upscale department store group, Nordstrom, or for clothing retailers like Gap, Urban Outfitters and Abercrombie & Fitch. Electronics retailer Best Buy also was punished by investors wary of its figures.

While all five did OK in the third quarter, it was the way they did it, the extra costs they revealed because of supply chain problems and the weak outlook that saw the shares in the quartet sold off heavily.

Both Urban Outfitters and Abercrombie and Fitch saw their shares slide 14% or more in the wake of what were essentially quarterly reports showing both companies marked time in the latest quarter.

Supply chain costs eroded profit margins thanks to higher transport costs and supply chain hiccups. Gap said a two-month hiatus in Vietnam because of high rates of Covid infections also hit stocks because companies in that country are major suppliers of fashionwear.

“While we had planned into the known supply chain constraints as we entered the quarter, including COVID-related closures in Vietnam, the shock to our business persisted longer than anticipated as weeks turned into months,” Sonia Syngal, GAP CEO, said told analysts on its results call.

Gap shares fell 24% off the back of the report and cuts to its forecast. Urban Outfitters shares fell 12% in two days. Best Buy shares lost 16% as well. Abercrombie and Fitch shares fell more than 15% over two last two days.

But the performance of Nordstrom was the most worrying for the managerial problems exposed in the quarter. The shares lost 29% of their value after management owned up to a series of mistakes and poor decisions.

The Seattle-based retailer reported a profit of $US64 million for the October 30 quarter up 21% improvement from the depressed same quarter of 2020 but barely half of what the company earned in the third quarter in 2019, before the pandemic.

Net sales were $US3.5 billion posted for the quarter was about 18% higher than the same quarter a year ago, but 1% below that same three months of 2019.

The problem was overstocks and under stocks of key products at its Rack discount stores saw sales fall 8% below 2019 levels, in contrast to the Nordstrom department stores, which saw a 3% gain from 2019.

The Rack’s struggles partly reflected inventory shortages, particularly in core categories such as women’s apparel and shoes, where demand was higher than the retailer had expected. The company simply bought too many unwanted products and were stick with bins of overflowing, unwanted clothes and not enough shoes which were in high demand.

Nordstrom executives pointed to external challenges, such as supply-chain problems and lagging sales in urban markets, where the effects of the pandemic on in-store shopping are more pronounced.

The weak third quarter performance followed a similar weak performance for the second quarter and a $US166 million loss for the first quarter.

All chains reported solid online performances but these were not enough to offset problems in their bricks and mortar outlets, unlike the mega retailers.

US retailing has clearly separated into two tiers with the mega chains like Walmart and Target now dominant as ever before.

Both giants revealed big risks in the third quarter by resisting the impact of inflation by absorbing prices rises into margins (it cost Walmart 0.42% of its gross margin), but working around shipping problems – Walmart chartered its own ships, switched suppliers in the US and offshore to secure product for the forthcoming selling season.

Both built inventories to avoid out of stocks in the selling season (Walmart boosted its inventories by 11.6% to ensure adequate product availability) the end of year sales.

The two’s tactics raised eyebrows and then got considerable applause, especially as both maintained or lifted guidance for the rest of the year, even though other retailers were cutting future estimates.

Home Depot said in its earnings call that it had products on 95 ships off the ports of Los Angeles and Long beach but had more than enough inventory for the holiday selling season.

The early months of 2022 could very well see more daylight between America’s mega retailers and the rest of the pack. Walmart, Home Depot, Lowes and Target are now in a position to resist and even attack some of the big online players like Amazon. The others could very well end up as road kill.



About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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