It's All About "Perspective"

Why looking under the hood on retail names is incredibly important

Source: Company financials, Koyfin.

The going trend on every investor’s mind in a post-pandemic world is, how have companies been able to weather the storm of inflationary pressure on consumers.

Given COVID pushed more money into consumers’ bank accounts (stimulus + saving) and increased the time it takes for freight shipments to make it to their destination, companies decided to take drastic measures. They started front-loading to make sure they would have inventory as seasons approached.

However, what they didn’t anticipate was the shift in consumer spending from hard goods to services/experiential. This has led to a slowdown in sales growth but an increase in inventory since they haven’t been able to turn them over as fast.

Above are 12 companies that operate in different areas of the consumer space and how they’ve seen inventory levels jump in comparison to sales growth.

Even looking at a 3-year stack, some companies have had their inventory jump by multiples of their sales growth.

These trends should be alarming for any investor suggesting 2 things:

1. Consumers might be pulling back on spending though retail sales, in general, are still doing very well, or

2. Companies have had poor inventory planning management and will have to continue heavily discounting merchandise to move it out the door directly putting pressure on margins for longer than expected

As earnings continue to roll out, investors should continue monitoring the situation but be cautious in the modeling of outcomes. We’ve already seen WMT and TGT make inventory comments twice. Patience is key.

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Until next time,

Paul Cerro | Cedar Grove Capital

Personal Twitter: @paulcerro

Fund Twitter: @cedargrovecm

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