The Weekend Edition # 42
Inventory-to-Sales Ratio, Retail earnings
Welcome to another issue of the Weekend Edition.
Thank you to all who’ve read and subscribed to the newsletter this week!
Here’s what we cover this week:
Macro - Inventory to Sales Ratio
Earnings of Week - Summary
The Week Ahead - Economic & Earnings Calendar
Let’s dive in ⬇️
Market Recap - 16 May to 20 May, 2022
Peak to trough, the S&P finally dipped into bear market territory before rebounding slightly on Friday before the close. We had a whole host of retailers reporting this week and it wasn’t pretty. The comps were challenging but inflation is proving to be a bigger problem than expected.
Sector rotations show some respite in energy, utilities and healthcare. Even consumer staples took a hit, mainly because of Walmart, Costco and Kroger.
Macro - Inventory Build Up
One of the key takeaways from the Retailers’ Earnings Results this week was the build up in Inventories. Inventory build up is a typical sign of the slowdown in the economy and one measure is to look at the inventory-to-sales ratio ticking up.
As consumer demand drops for discretionary goods and liquidity starts to decrease in the economy, retailers will be left with inventory that they can’t get rid off quickly enough. [I’d written about this in detail here]
A few of the takeaways from the earnings calls this week:
The rate of inflation has been surprising. So it’s not just that there is a general level of inflation in the economy but the rate of increase and the persistence is what is causing a real problem.
People are buying groceries but not merchandise. So the level of discretionary spending has dropped and this is exactly what was expected.
The problem with a decrease in spending on discretionary items is that it creates a pressure on margins. General Merchandise tends have higher margins vs. staples.
While the average basket size has increased, the items per basket have decreased because the per item cost has gone up. Purchasing power for consumers is decreasing and this doesn’t bode well for retailers as more and more people will move to lower cost, low margin items.
Earnings of the Week
We’re at the tail end of earnings season and the overall picture hasn’t been pretty.
To date, 95% of the companies in the S&P 500 have reported earnings for the first quarter. In aggregate, earnings have exceeded estimates by 4.7%, which is below the five-year average of 8.9%. - FactSet
We’ve seen a number of companies reporting negative EPS surprises and Revenue surprises but the extent to which we’ve seen negative price action has been much higher than that last several quarters.
The Week Ahead
Although, we’ve technically come out of the bear market for the S&P, I don’t think we’ve hit bottom as yet. We will see rallies, of that I have no doubt. But, I don’t think the general downtrend is likely to improve.
We have more of the discretionary retailers reporting next week, not to mention a few more technology companies and we will likely see negative surprises.
Most importantly, QT starts in just over week. I suspect we will not see an immediate impact but remember, the market moves on sentiment.
Here’s wishing you a happy week ahead, and safe investing.
Ayesha Tariq, CFA
There’s always a story behind the numbers
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None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have no affiliation with any of the companies that are mentioned.