The end of the first quarter earnings season has highlighted two clear desires of investors: more cash and less inventory.
Technology companies are struggling to bring together the former, while retailers are stuck with too much of the latter. And in its own way, every industry is telling the market that a paradigm shift produced during the pandemic has become a transitional phase of this economic cycle.
Dick’s Sporting Goods (DKS) became the latest retailer to report inflated inventories on Wednesday morning, with a 40.4% increase in its stock during the first quarter as sales at same stores fell 8.4%. The company also cut its year-round outlook, saying it expects in-store sales to fall by 2 to 8 percent this year amid what it called “evolving macroeconomic conditions.”
Inventory creation is not exclusive to Dick’s.
As we have heard in recent weeks, more than 40% of inventory generations have been observed in retail parents, such as Target (TGT), Abercrombie & Fitch (ANF) and Kohl’s (KSS). Even Walmart’s ruthlessly efficient supply chains (WMT) led retailers to build inventories by about 24% during their most recent quarter.
Retail industry stocks rose in the most recent quarter as sales fell amid inflationary pressures. (Source: Yahoo Finance)
For consumers, the potential benefit is that sales could reach the summer shopping season and back to school. And perhaps these price cuts to clean up inventories could offer some benefit to the Federal Reserve’s plans to reduce inflation.
However, the increase in retail inventories in the first months of 2022 also tells us what the history of this sector will be during the balance of the year, during which we hope to hear a lot about “sizing correctly” or “optimizing “or” manage “inventory levels.
And on this clear path to relieving the pain of the industry, we see echoes of how the tech industry has started communicating with investors over the last month. Companies ranging from Uber (UBER) to Meta Platforms (FB) and Robinhood (HOOD) announced versions of plans to streamline costs, reduce or reduce staffing, and emphasize free cash flow.
The story goes on
And while the details of these two industry-wide initiatives may be different, the momentum has similar origins: as the economy overcomes the distortions induced by the 2021 pandemic, we see that what appeared to be new paradigms of the industry falls into disgrace while trying. and the real ways to create value return.
At the same time, the investor expects retail to gain structurally higher margins after the pandemic seems to have broken, while the technology industry’s “grow now, profits after” model has been reversed.
Another pandemic truth for investors that seems to have been only a moment in time.
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Myles Udland is the senior market editor for Yahoo Finance. Follow him on @MylesUdland
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