Inflation, Semiconductors, & Labor Themes Continue Through Earnings Season

Investors are mulling over another group of retail earnings on Thursday that resembles a walk around the mall. Macy’s M was up 12.5% in premarket trading on better-than-expected earnings. The company said it has been able to pass on higher costs to consumers and will continue to do so for as long as it can. Kohl’s KSS also beat on estimates and rallied more than 8% before the bell. Finally, Victoria’s Secret VSCO is also rallying 11% in premarket trading after beating estimates.  

Overall, retailers have performed well this earnings season. The Dow Jones U.S. Retail Index ($DJUSRT) has rallied more than 11% since October 1. Macy’s, Kohl’s, and Victoria’s Secret all lifted forward guidance. With so much nervousness around supply chain issues, this is good news for getting back to normal.

The ability to pass on costs has been a theme through this earnings season and so has the semiconductor shortages. The high demand for semiconductors was reflected in Nvidia’s NVDA earnings report. The company beat on earnings and revenue prompting a premarket rally of more than 8%.

It’s not all good news. Cisco CSCO missed on revenue despite beating earnings estimates and issued disappointing guidance. The news prompted a 5.87% selloff in premarket trading. Cisco has historically been a pretty good bellwether for the overall economy, so these developments are worth watching. Alibaba BABA is also down more than 5% before the bell after missing on revenue as well as earnings and topped it off with lower guidance.

Another theme we’ve seen during this earnings season is labor shortages. Deere DE appears to have resolved its labor dispute by providing higher wages to its union workers. The agreement should end a month-long strike. The stock is up more than 2.8% on the news.

Don’t Discount Retailers

On Wednesday, TJX Companies TJX rallied more than 7% on better-than-expected earnings because of a 14% increase in same-store sales year over year. This makes two strong quarters in a row as shoppers return to in-store buying. 

If you’re not familiar with TJX, chances are you’ve seen their stores, which include TJ Maxx, Marshalls, HomeGoods, HomeSense, and more. Like others in the reselling merchandise group, they offer discounted name-brand apparel and home fashions. After today’s close, competitor Ross Stores ROST will announce earnings, and Burlington BURL announces next week. Another store in this group you may not know of unless you’ve traveled around the Western Hemisphere is PriceSmart PSMT. It serves Central America, South America, and the Caribbean. All of these stores and their subsidiaries cater to consumers looking for a deal during inflationary times.

Looking at the chart below, many of these stocks have moved mostly sideways for the year despite some volatility. These companies haven’t experienced the recovery of other big box stores because they don’t have a large online presence. They rely heavily on traffic through their brick-and-mortar markets. This means they struggled during the pandemic but could benefit from the reopening.  

CHART OF THE DAY: DISCOUNT DERBY. TJX Companies (TJX—candlesticks) became the top performer among these four stocks for 2021 on Wednesday. It’s followed by Burlington (BURL—blue), then Ross Stores (ROST—pink), and finally PriceSmart (PSMT—green). Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. 

Strengthening the Dollar: Another group of retailers that could benefit from bargain shoppers trying to deal with inflation is the dollar stores. These include Dollar General DG, Dollar Tree DLTR, and Five Below FIVE. According to The Wall Street Journal, one problem these stores are having with inflation is finding items they can sell for under a dollar. So, when it comes to names, Five Below may have the edge.

On Tuesday, Dollar Tree rallied on news that activist investor Mantle Ridge had taken a $1.8 billion stake in the company. Mantle Ridge is credited with helping to engineer a turnaround for Dollar General.

Outside of the higher price point, Five Below is different than the other groups because it focuses on trendier merchandise that targets pre-teens and teenagers. However, the company is still having to deal with inflation and recently launched its Five Beyond section for items that cost more than $5 in 270 of its stores.

Thrifting: Thrifting isn’t just for mom-and-pop shops, but big business for companies like Big Lots BIG, eBay EBAY, Etsy ETSY, and ThredUp TDUP. Big Lots is more than thrifting; it also buys and resells overstock merchandise similar to TJX and Ross. In March, the company announced plans to open 50 to 60 stores in 2021 and currently has more than 1,400 stores around the United States.

Many analysts are looking to eBay and Etsy as possible beneficiaries of the cramped supply chain because many users of these platforms locally source their materials and products. eBay has been around the longest, so you might think it’s best positioned for thrift shoppers. However, the company has been losing ground to its competitors.

Etsy is working hard at taking eBay’s market share. Etsy’s platform allows people to sell their handmade items, vintage, and on-trend clothing, jewelry, and more. At the first of the month, it announced strong earnings, but the stock still fell. However, it rallied in the following days as analysts started upgrading it. Since its earnings announcement, the stock has risen nearly 20%.

Another company looking to get in on eBay’s action is ThredUp, which is peer-to-peer clothes thrifting. The stock went IPO back in March but hasn’t fared so well. The company is down 2% from its IPO price. On Wednesday, the company released a report that found many interesting statistics like 52% of consumers are concerned about rising prices for popular gifts, one in three believe inventories will be limited, and 72% of GenZers said they were open to secondhand gifts, which could be good news for the company.

Battle of the Behemoths: When it comes to online shopping platforms, it’s hard to beat Amazon AMZN. According to Statista, Amazon accounts for 41% of U.S. e-commerce. Walmart WMT is in second with 6.6%. And eBay rounds out the top three at 4.2%.

However, no one really questions Amazon’s dominance, but recently people are questioning their ability to deliver for the holidays. At the end of October, the company announced that it was spending billions of dollars to avoid holiday delays. Similarly, Walmart told investors during its earnings call earlier this week that its stores were stocked and ready for the holidays.

While Amazon may dominate online, Walmart has 4,742 Walmart stores and 600 Sam’s Clubs in the United States, and an additional 5,224 international stores. Amazon has 89 stores plus 589 Whole Foods grocery stores. If consumers want to get out of the house to do their holiday shopping, Walmart could have an advantage in the battle of these two behemoths.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image Sourced from Pixabay