For US Retailers, ‘Better-Than-Feared’ Is The New ‘Good’

“Better-than-feared” was about all analysts were able to muster on Tuesday, when Best Buy cut guidance and described efforts to “proactively navigate” what CFO Matt Bilunas called a “rapidly changing environment.”

The company now sees revenue of between $48.3 billion and $49.9 billion for the current fiscal year, and adjusted EPS of between $8.40 and $9.00. Previously, Best Buy saw $49.3 billion to $50.8 billion in sales and $8.85 to $9.15 in EPS. Comps will be -3% to -6%, compared to the prior forecast of -1% to -4%.

None of that was good, but neither was singularly terrible, especially in the context of last week’s retail wipeout, which included historic one-day losses for shares of Walmart and Target, not to mention dramatic routs for Kohl’s and Ross.

Best Buy’s numbers “we think are better-than-feared as WMT/TGT last week suggested an electronics environment that was even weaker than BBY is signaling,” Vital Knowledge’s Adam Crisafulli said Tuesday.

The shares waffled, and it was probably safe to say they’d have been higher were it not for a broader market swoon catalyzed by Snap’s guidance cut.

I highlight Best Buy’s results for obvious reasons: This is the most critical juncture for consumer goods demand in recent memory. In addition to the long awaited goods-to-services switching dynamic analysts and economists have spent the last year predicting, surging inflation is eroding households’ disposable income. When food and gas are more expensive, discretionary purchases are the first casualty. Voracious demand for scarce goods post-pandemic means many consumers have already overbought and stores may have over-ordered in a frantic attempt to keep up with demand.

All of that suggests retailers have an excess inventory problem the scope of which is likely not well understood by investors.

Read more: So, You’re Finally Awake To America’s Inventory Problem

Best Buy CEO Corie Barry echoed Snap’s Evan Spiegel in flagging a real time deterioration in the macro environment. “Macro conditions worsened since we provided our guidance in early March which resulted in our sales being slightly lower than our expectations,” Barry said Tuesday. “Those trends have continued into Q2 and, as a result, we are revising our sales and profitability expectations for the year.”

Margins came up a bit short, but the YoY contraction (120bps) wasn’t a disaster. Still, the company mentioned “increased promotions and higher supply chain costs,” which were only partially offset by “higher profit-sharing revenue from the company’s private label and co-branded credit card arrangement.” With the caveat that I’m no retail analyst, I’m going to go out on a limb and suggest that if you’re a big box retailer, you’d rather make your money on product sales and logistics management, not financing initiatives.

Again, I should emphasize that the market was generally relieved with Best Buy’s results. Plainly, people who know what they’re talking about think the company performed well, all things considered. The point is simply to note that Best Buy is absolutely experiencing some drag from the very same dynamics affecting America’s other big-name retailers.

If you’re curious as to the impact of stimulus checks, note that Best Buy’s domestic comps decreased 8.5% in Q1. That figure for Q1 2021 was an increase of 37.9%.

Meanwhile, shares of Abercrombie & Fitch fell the most in more than 20 years (figure below) after the company posted an unexpected loss for Q1.

Gross margin was 55.3%, more than 400bps short of estimates. Operating margins for the year will be 5% to 6%, the company said. Previously, it saw 7% to 8%.

Net sales of $813 million actually represented Abercrombie’s best first quarter since 2014. The company said it reduced promotional activity. However, CEO Fran Horowitz said, “this was more than offset by higher-than-expected freight and product costs.”

Inventories rose 45% YoY. The company cited “increased in-transit inventory, higher units on hand and increased average unit costs driven by freight.”


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2 thoughts on “For US Retailers, ‘Better-Than-Feared’ Is The New ‘Good’

  1. Retail results would suggest that the FOMC is not going to be able to raise rates/reduce the balance sheet as quickly as they are saying. Of course, they could be talking nasty to reduce the need to actually raise rates more later on. If I was on the FOMC, I would advocate raising rates a bit, but more slowly. They have made their point. The markets and consumers are reacting. Now is the time to take stock and slowly adjust rates if necessary to slow down inflation. Stiglitz put it best- much of the problem emanates out of the supply side. Nothing the Fed can do about that. Inflation is a worldwide problem- and countries with less fiscal and monetary stimulus are seeing inflation numbers not that different from the USA.

  2. Considering BBY’s -10% comp in computers, cellphones and CE, how to calibrate “better-than-feared” for the most successful retail product in the world that is 13% of QQQ and 6-7% of SPY. I think that is the $640BN question.

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