By Mark Solomon of FreightWaves
There’s little in retailing that Walmart and Target aren’t prepared to handle. So it was jarring that over a 24-hour period the two scions of the trade posted weak first-quarter profits that appeared to blindside management at both.
Part of the bottom-line blowup was due to fuel, which soared to record highs following Russia’s Feb. 24 invasion of Ukraine. Part of it was due to margin pressures caused by an unfavorable sales mix as consumers shifted their buying from higher-margin goods like electronics to less profitable items like groceries. An extension of that was an overshoot of inventory-stocking activity, which came back to bite the retailers after waning concerns over the COVID-19 pandemic pushed more consumer buying toward services and “experiences” and away from goods.
There’s little that retailers can do about fuel prices. It can be argued they should have expected the pandemic-driven buying spree from March 2020 until the end of 2021 to peter out and that they should have planned their inventory strategies accordingly. Yet demand forecasting has always been a tough nut to crack, and the market is where it is. Inventory build may also have been the result of supply chain delays at the start of the year that resulted in some late deliveries of impaired freight.
Inventory levels as of March, when compared to activity in March 2019 after inventories stabilized following a major pull-forward in 2018 ahead of the Trump administration’s China tariffs, produce a mixed bag of results. Unsurprisingly given the current dearth of motor vehicles, the ratio of vehicle and parts inventories to sales has fallen considerably, according to federal government data analyzed by Michigan State University. Apparel inventories to sales also declined over those periods, as did e-commerce.
However, furniture, home furnishings and appliances, building materials and garden equipment, and a category known as “other general merchandise,” which includes Walmart and Target, among others, reported higher inventory-to-sales ratios, according to government data analyzed by Michigan State.
For the latter sectors, the change has happened fast, according to Jason Miller, logistics professor at MSU’s Eli Broad College of Business. As of November, inventory-to-sales ratios were at pre-COVID levels, Miller said. They have since exploded upward.
Miller said he expects a “cooldown” in retailer order volumes, even if inflation-adjusted sales stay constant, as retailers look to reduce their existing stock. He also expects retailers to launch major discounting programs to expedite the inventory burn. Fewer orders within certain categories bodes ill for carriers whose networks are strongly tied to inbound lanes to retailers’ distribution centers, Miller said.
In a Friday note, Bascome Majors, analyst for Susquehanna Investment Group, said that the spread between year-over-year sales and inventories — a rough barometer of the impact of higher sales on restocking activity — turned positive in spring 2020 and accelerated in favorable territory for four consecutive quarters. Gradually, however, the spread has turned negative, according to Majors. In this year’s first quarter, inventory growth exceeded sales growth by 200 basis points. The recent surge in inflation, Majors wrote, has severely distorted inventory and sales trends.
Freight recession priced in?
For some, high inventory levels are an expected occurrence and should be welcomed. In a Tuesday note, Amit Mehrotra, transport analyst at Deutsche Bank, said rising buffer stock is part of retailers’ desire to have goods available when consumers scan the shelves. Mehrotra added, however, that the data points translate into a likely slowdown in freight flows in the coming months and quarters.
He said that a recession is already priced into most transportation equities, noting that the shares of most trucking companies are higher over the past 30 days while the broader market is about 7% lower.
Continue Reading: zerohedge.com
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