Retail: Prices are High, Sales are Higher (and the industry may still be cheap)

Strong Consumer Demand Bodes Well for Retailers

Inflation is definitely being felt by consumers, but it doesn’t appear to be impacting their spend behavior – at least not yet. Retail sales data released earlier this week showed a +1.7% m/m increase, its highest monthly increase since March and marking 5.1% on a y/y basis.¹

Spending growth on retail and food services is currently well above its five-year trend. We’re not surprised by the strong demand, as consumers are flush with cash from the government stimulus checks. Recall, American consumers have accumulated around $2.5 trillion in excess savings during the pandemic, and we expect this to be a tailwind for retailers in a seasonally strong Q4.

Indications of improved labor and supply chain conditions will further benefit retailers and consumers but will take a while to get back to pre-pandemic levels.

Retailers that went lean during the pandemic – cutting costs in labor, reducing inventory – invested in their digital marketing and e-commerce businesses. The omnichannel model now allows the consumer to access products via a number of different touch points and has led to increased consumer spend. In addition, for improved user experience, retailers are investing in machine-learning software to help consumers shop, same-day delivery for their unanticipated needs, expedited check-out to save time and other tools to make shop-at-home even more efficient.

Re-open for Hiring

Higher wages and better labor markets support increased consumer spending and demand. Labor market tightness is beginning to ease. Supply chains also show signs of improvement, with good management teams enabling more efficient sourcing and reduced freight bottlenecks (in part due to more labor). These dynamics indicate to us a slower pace of rising prices for certain consumer goods (but still elevated) and more dollars in consumer pockets.

We are confident that as labor markets improve and hiring increases, supply-chain bottlenecks will also improve since labor shortages are a significant reason for those bottlenecks, particularly in freight and distribution. While many companies have indicated that they expect supply chain challenges to persist into H2 2022 and beyond, they’ve also indicated that product flow from distribution is improving and service constraints should begin to ease with additional labor.

Retailers have invested to improve operating efficiency – including dual-sourcing, technology and capacity. These investments are already leading to better margins.² There are also longer-term benefits to unlock from new investments, like strategic industrial distribution centers and more sophisticated logistics. These investments should position companies to more effectively meet the future of demand, well beyond 2022. Walmart (WMT) has “doubled fulfillment capacity versus last year” and American Eagle (AEO) actually acquired their own logistics company to gain more control of its supply chain.³

Industry Focus: Home, Auto and Multiline (off-price) Retailers

The retail industry has broadly outperformed the S&P 500 and the consumer discretionary sector (of which it is a part) year-to-date. Home improvement retailers have posted strong earnings given the solid housing market, repair and maintenance recurring revenue, and low interest rates.

Auto retailers have also reported strong earnings on a shortage of new supply and DIY trends. Chip shortages, which have prevented many new vehicles from hitting the market, are resulting in consumers repairing and maintaining their existing vehicles for longer. Certain auto parts are essential and nondiscretionary for consumers, so pricing power can be significant.⁴ Finally, off-price retailers also are showing strength driven by the treasure hunt experience, ample inventories and higher priced transactions.

Discount Buying Opportunity

The NTM P/E ratio for Retail stocks is currently 15.94x (14% below its historical 5-year average). Meanwhile, LTM EPS is $5.87 for the group (163% above its historical 5-year average).⁵

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Sources

1. FactSet (chart)
2. FactSet (chart)
3. Retail Dive
4. FactSet (chart)
5. FactSet (chart)

Disclosures

Investment Solutions at Hightower Advisors is a team of investment professionals registered with Hightower Securities, LLC, member FINRA/SIPC, & Hightower Advisors, LLC a registered investment advisor with the SEC. All securities are offered through Hightower Securities, LLC and advisory services are offered through Hightower Advisors, LLC. This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Investors may lose all of their investments. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources; as such, neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of Hightower Advisors, LLC or any of its affiliates.