Shhh... Recession forgot to tell retailers it is here...

Big box retail. “Nice recession you got there”

 

Sales are up, EPS is down.

Could mean that inflation is driving their costs up (higher wages and COGS surely are!) - but it also isn’t always 1:1 because we don’t know what particular companies are doing operationally. Before inflation started running hot, a lot of retailers were already seeing higher costs due to expansion of e-commerce and delivery/pickup, I’d argue these shifts also contributed to inflation (more demand on packaging materials means packaging materials goes up, and the pandemic created substantial shifts).

That is why sales is generally seen as a better indicator of what the consumer is doing and Wal-Mart in particular is a bellwether for consumers.

 

https://www.cnbc.com/2022/08/03/walmart-lays-off-corporate-employees-after-slashing-forecast.html

Amazon announces layoffs after Biden admin links 'recession' to low unemployment | The Post Millennial

 

WalMart raised their full year earnings guidance today during their 2d quarter earnings release, which is why their share price is up.

Walmart stock jumps after profit pulls a classic ‘beat the guide down’ — MarketWatch

 

I hope this isn't a mirage. There are other indicators moving away from this. For example, BestBuy apparently doesn't share the optimism. And Walmart is cutting jobs at corporate. A lot of the tech firms have already frozen hiring and are pivoting towards layoffs (e.g., Meta, Google). Just additional data points.

WSJ News Exclusive | Best Buy Cuts Store Jobs to Help Boost Profits

WSJ News Exclusive | Walmart Lays Off Hundreds of Corporate Workers

 

I am amazed Best Buy is still in business. Their demise won’t be because of a recession.

 

A big driver of the earnings increase was…inflation driven.

Walmart said in their earnings call they’ve seen evidence of two important things…1) more and new upscale customers visiting their stores and 2) folks on the lower household income spectrum trading down…from beef and higher cost vegetables to canned tuna and beans.

Suffice it to say inflation is hitting the bottom half of the consumer spectrum hard, and is even forcing upper income households to rationalize spending and look for ways to cut costs. I’m in the latter camp with a six-figure household income and we’ve already cut out luxury home goods and switched certain grocery items to lower cost purchases.

There’s no doubt the economy is still healthy from an employment perspective. But inflation is having a significant and quantifiable impact on the average American household.

 

Transactions were down though at Home Depot. Let’s see what happens.
also Walmart lowered expectations earlier so not a surprise they met those projections.

 

The Big Box and retail spending is mostly from the well-to-do.
Middle and lower classes are hurting from Biden's inflationary policies.
High rents are killing younger consumers, mostly Gen Z.
As a result, more and more kids are moving back in with Mom & Dad.

"With roughly 34% of US households being renters, a sizeable increase in rental prices have squeezed consumer wallets," the report said.

That has meant more Americans are struggling to pay rent. At the same time, higher mortgage rates have depressed consumer sentiment over house buying to its lowest levels in a decade, with only 17% of consumers saying it's a good time to buy a home in the current economic environment, according to Fannie Mae.

"A significant increase in rent can have meaningful impact on household financial situations, particularly for middle and lower income households," Bank of America said. Based on the data, all income groups have seen increases in rent payments, but those particularly feeling the pinch are those with annual household income between $51,000 and $150,000.

Younger consumers, especially Gen Z, are getting squeezed the most by surging rent rates as inflation bites the US economy, says Bank of America (msn.com)

 

Not sure how the model would work but if they could be some kind of electronic showroom it might be a path to survival. Don’t know how being a showroom makes money though.

 

The picture isn't all rosy, for sure, but it's also not all doom and gloom either. We've been seeing mixed messages on the economy for months. And while that's unprecedented, it really isn't a surprise. We're coming out of the first pandemic in modern times. We really have no idea what to expect.

The retail numbers are positive. Yes, there have been shifts in spending habits, and much of the income is because prices are higher, but these numbers show consumers are still spending. There have also been indications that inflation is slowing down, including the last report that showed no inflation Month over Month between June and July. If the trend of no to low inflation continues, then it's likely the consumer spending continues as well. Unless there are massive layoffs.

And while there have been some small layoffs announced, so far, it's been nothing massive. And there are still soft landing spots for those laid off. There are still more job openings than unemployed right now. Not to mention, strong recent job creation reports. The fact there are still plenty of companies hiring shows there is potential for a soft landing for any recession, as those who are laid off can and do find work in a relatively short amount of time.

Housing and rent prices are still a potential problem, and likely due for a correction. I live in what was one of the hotter areas in a hot housing market in Phoenix. But even my property lost about 3% value recently on Zillow. It's anecdotal, but also saw signs for three open houses this past weekend, when last month, there weren't any, because houses weren't on the market long. Just adds to the uncertainty of the current situation.

 

It pays to be the last man standing. Circuit City, Radio Shack, HHGregg, CompUSA, The Wiz, all gone.

That equals clout and when your the only real brick and mortar for a one stop place you will survive. Especially if your product is cutting edge and aimed at tech.

Best Buy is also being innovative in attempts to be an incubator and social media producer. This may be what bridges it to its future.

People still want to touch, hold and see their tech live and in person. Amazon cant show you how vibrant that 8k 17ft screen is. They wont service and install it.

Best Buy won the war and they are reaping the benefits.

How that bodes tomorrow is unknown.

Best Buy is likely sitting on a supply/margin issue as its sales are down but inventory is flatlined (comp y over y).

If thats an anomaly or a trend will say a lot about what Best Buy does in the years to come.

 

Radio Shack is the only one on that list I remotely cared about because they were more components than systems (except for the Trash 80), though the one I really miss is Frys.

 

HH gregg had a Real Estate problem imo. They tried to fill big box leases, but had inventory that would not fill a Dollar Tree at many locations. So much open (wasted) space and bad selection. Thats why they basically disappeared over night.

Circuit City was too heavily invested in low income urban areas with RE, while Best Buy was going suburban where the money was fleeing to.

Best Buy won this battle with good Real Estate choices.

 

I bought a lot from Circuit City, I was sad to see them go. But realistically as Best Buy rose, Circuit City fell. There wasn’t much overlap between them. There was probably never room for 2 major electronics stores like that (esp factoring in the growth of Wal-Mart and Target going on as well, not to mention Amazon and e-commerce).

I ordered some stuff online from
Fry’s, but weren’t they mostly regional/west coast?