Retail Tales Tell a Bad Story concerning the Economy – Investment Watch

by David Haggith

December is imagined to be the month when retails sales flourish. As an alternative, retail sales got here in way below expectations. Retailers were left with warehouses stuffed with overstock, and this case has been dragging on for a couple of yr now with little sign that it’s getting any higher.

Consensus expected a headline decline of 0.9% MoM…. The headline retail sales print for December tumbled 1.1% MoM – the most important monthly drop since July 2021 and second straight monthly drop

Zero Hedge

Each brick-and-mortar and online stores took the hit.

On a year-on-year basis, retail sales were flat … or seemed to be, but let me dig into that when again.

You might keep in mind that on January 6, I wrote,

You might have actually heard news that touted holiday retail sales as being strong. I do know I did, but that was a veiled lie that requires digging deeper. As I’ve noted before, retails sales are measured in dollars. The expansion in sales was due entirely to inflation in prices/devaluation of the dollarFactor out the new inflation that made retail seem good year-over-year, and you’ve a REAL decline in sales throughout the holiday season.

To know how news of surface-level rises in retail can actually mask sales which can be dropping, one has to have a look at inflation. Inflation forces one to look beneath the surface of all reports lately which can be measured in dollars to see how much of what’s being reported is just inflation that hasn’t been adjusted out of the numbers. The actual fact is, retailers not only sold fewer items, but they made loads less money (in profits) because they’d to supply loads more incentives to get those sales.

It’s Worse Than it Looks: Beneath the Surface the Bottom is Falling Out, and Individuals are Jumping out of Windows

The identical thing applies again, those flat YoY comparisons are literally deeply negative as soon as you adjust inflation out. I noted in that recent article how financial reporting sugar-coats the bad news, quoting first from Yahoo as an illustration!

U.S. online spending throughout the 2022 holiday season rose by a better-than-expected 3.5%, a report by Adobe Analytics showed, as retailers used hefty discounts to lure inflation-weary consumers into spending on every little thing from toys to electronics.

Shoppers spent a record $211.7 billion online over the vacation season.

While U.S. online holiday sales rose, it grew on the slowest pace as consumers felt the brunt of rising prices.

Yahoo!

It didn’t actually grow in any respect. The article effectively lied, so I noted what the Yahoo! article doesn’t say:

It doesn’t say that sales didn’t rise AT ALL, but actually FELL, should you factor that inflation back out of the costs sales are measured in — the identical inflation that made even the surface-level (unadjusted) growth “slow” as consumers felt the brunt. What we actually had was slow HEADLINE growth, which translated to sharply declining REAL growth because consumers dialed back purchases. On top of that, retailers made lower margins on what little they did sell because they’d to supply steep price discounts from the manufacturers’ highly inflated price recommendations. This all means they could have actually taken losses to get that higher dollar value in total sales. (“We’re losing money on every item sold, but we’re making it up on volume!”)

It was the third-worst week for retail in history!

Well, today we also got news that proves all of that out if we take a more in-depth have a look at one component of retail (one among the most important components during December) — toy sales:

The vacations ushered in historic bargain prices on toys – and 2023 guarantees even deeper discounts for consumers while delivering more pain for toy sellers….

“For the primary half of the yr, if not the whole yr, toys will proceed to be deeply discounted and toy makers’ profit margins will shrink drastically,” said Isaac Larian, chief executive of MGA Entertainment, maker of LOL Surprise and Bratz dolls….

The Recent York Post

And here we were delivered proof of the inflation factor as well:

Overall sales revenue from toys increased 3% in 2022 from January to September while the number of toys sold decreased by 3% over the identical time period, in keeping with NPD.

Yes, the rise in revenue was just counting inflation since the actual variety of items sold was lower. I pointed the identical thing out last spring after I noted the numerous misrepresentation in how things are reported and stated that one has to dig beneath the surface to get the reality:

Things get a little bit dicier as you look behind the retail veil…. Now I’m going to point out you where the bodies are buried on this retail apocalypse despite the fact that revenue was reported as seeing positive growth, which investors liked until they turned over a little bit earth and looked beneath the surface. Seems the revenue growth reported by corporations like Walmart and Goal was actually all about inflation. The numbers will not be inflation-adjusted….

Here is the in need of all of it added up: Consumers bought a little bit more stuff and paid loads more for it, so consumer spending went up even greater than inflation. Thus, retail revenue went up; nevertheless, it didn’t even go up as much as consumer inflation (up 4% by Goal, 2% by Walmart). Which means retailers sold more stuff (given the expansion we see on the consumer-spending side), but they made loads less money on it.

The Retail Apocalypse was Bloodier than it Looked

Back then, there was some improvement on the surface within the numbers being reported. This time, nevertheless, even the headline numbers have gone down. Last time, when the unadjusted numbers went up, that happened during 1 / 4 when GDP went down. This time, even the raw revenue numbers went down — way down. So what does that inform you about what ought to be happening in GDP within the last quarter — at the least within the retail component?

If nominal sales sank this much in December with the assistance of inflation, you possibly can readily do the mathematics to work out how much worse they’re after you adjust for inflation; however the facts worsen: Lots of those sales wouldn’t have happened in any respect, especially in toys, without massive price-slashing or other types of discounts.

That’s a precipitous drop from pandemic years when toy sales grew by 22% year-over-year in 2020 and by 12% in 2021.

Toy prices, which generally rise after Black Friday because popular items grow to be scarce, actually declined one other 10% through Dec. 23, according Linda Bolton Weiser, an analyst for investment bank DA Davidson.

The Recent York Post

So, the costs took a steep cut, however the dollars the full is measure in are still not adjusted for an actual (constant) dollar value. In the event you drop the sales price from $100 to $90, you continue to must consider that the $90 is price ~7.5% lower than it was a yr ago. Dropping the value doesn’t factor out inflation on the rest of the value.

MGA saw its holiday sales decline by about 10%, the primary drop in six years…. The steep discounting began in early November, or much sooner than usual….

While online toy sales grew by 206% from Nov. 1 to Dec. 31 in comparison with a yr ago, the industry needed to depend on deep discounts, reaching a markdown peak of 34% off in comparison with 19% last yr, to sell its holiday haul….

Toys were more deeply discounted than every other category of merchandise. Electronics had the second highest markdowns with a mean 25% discount, in keeping with Adobe.

Note that the massive increase in online sales was only for toys. Overall, online sales fell 1.1%.

On top of all this, holiday operating costs were higher as a result of wage inflation at a time when it’s already typically hard to get enough holiday help. Due to this fact, profits should have really gone south.

“This will probably be a troublesome, difficult yr, actually the primary half,” said Jay Foreman, chief executive of Boca Raton, Fla.-based Basic Fun toys.

An all this huge discounts still left inventories bloated:

“Now we have numerous extra inventory now, but we expect it to be passed by the second half of the yr, and anecdotally I’d say [the big retailers] can have a little bit bit greater than they’d hoped for,” Foreman said.

They were saying that eight months ago. Being left with bloated inventories, retailers are cutting back on purchases, and manufacturers are cutting back on production, making a backward effect throughout the general economy.

In its latest “Beige Book,” conveying corporate reports from December, the Fed said,

Many retailers noted increased difficulty in passing through cost increases, suggesting greater price sensitivity on the a part of consumers [and] some retailers offered more discounts and promotions than they’d a yr ago with a purpose to move merchandise and filter excess inventories….

Zero Hedge

Clear back last spring I noted the importance of this inventory-and-inflation problem:

Soaring costs and swollen inventories have retailers on the ropes, and investors fear that the punishment won’t ease anytime soon.

The Retail Apocalypse was Bloodier than it Looked

Greater than half a yr later it has hardly eased in any respect. Inflation continues to be wrenching the economy and the stock market prefer it was back then, and inventories are still grossly overstocked, even with the blowout sales I said way back then might well be coming:

Some analysts have speculated those swollen inventories will cause price reductions with a purpose to have inventory blowout sales due to the fee of soaring inventory. That is a component of their basis of hope for considering inflation will now back off….

Nonetheless, it’s clear that making those cuts will mean making even less in profit margins on items they’ve already bought at greater inflation rates than they’ve passed along (and certain less in earnings per share) in the following quarter. Selling what they did at the value they did already wounded retailers badly with investors once they didn’t pass along the total increase of their cost of products sold or their operating expenses….

That’s the reason retailers are on the ropes. In the event that they lower prices to blow out a few of that inventory, they could lose more interested stock investors, so their stock values may fall further….

They’re caught within the crush now between rebelling investors and rebelling customers. There’s simply no assurance that works out nicely. That’s one reason why this high inflation can rip an economy to shreds and the stock market to shreds at the identical time, as I warned last yr it would do. Now, we’re seeing how that plays out in real time.

And it’s still playing out in stocks today! I reported it as a “an absolute bloodbath for retail” within the stock market back then:

a disastrous few days that sent giants like Walmart Inc. and Goal Corp. to their worst stock-price drops since 1987.

That was when the S&P first hit bear-market territory, and it still looks like a bloodbath in stocks today, too, despite the fact that the S&P sits lower today than it did back then, and the ride continues to be only a rough.

 

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