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Cathie Wood: Here’s the Biggest Problem Facing Target and Walmart

Ark Investing’s Cathie Wood thinks both chains have a problem which could be good for consumers, but maybe not investors at least in the short-term.

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1 year ago

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Ark Investing's Cathie Wood thinks both chains have a problem which could be good for consumers, but maybe not investors at least in the short-term.

The pandemic has made inventory projections tricky. Usually, when a retail chain makes inventory decisions, it uses its past history and factors in any new information.

In a normal year, that model makes sense. In our current Covid pandemic hellscape, past behavior may not be indicative of what happens in the future. Remember when stores had toilet paper shortages? That happened because a lot of people stopped going to work and office toilet paper and home toilet paper are different things.

Production had to be changed to meet the change in where people used toiler paper. That same problem happens across the entire retail supply chain as retailers including Target (TGT) - Get Target Corporation Report and Walmart (WMT) - Get Walmart Inc. Report first struggled to have enough inventory, then fought to have the right inventory, and now are dealing with having too much inventory.

That's a problem that Ark Investing's Cathie Wood pointed out on Twitter.

Basically, the two retailers have more inventory than they want. That ties up cash and, depending upon what the inventory is, can lead to items having to be discounted or certain products going bad. It's also possible that both chains (which don't exactly sell trendy merchandise or fast fashion) could simply work through their inventory excess over the next quarter or two.

TheStreet

Target and Walmart Comment on Inventory

Both Target and Walmart acknowledged having inventory problems during their most recent earnings calls. Walmart CEO Dog McMillon laid out why his company has too much inventory on hand and the market conditions that contribute to it during the chain's first-quarter 2023 earnings call.

"The second item relates to our general merchandise (GM) inventory level, primarily in Walmart U.S.," he said. " GM was a lower percentage of total sales in Q1, resulting in an unfavorable gross margin mix. We also had higher costs for containers and storage, and we've taken and are taking steps to contain those cost pressures to the first half of this year."

The CEO acknowledged that the quarter was going to be a challenge when it came to general merchandise because the company was "up against stimulus dollars from last year."

That, however, was not the only reason Walmart added to its inventory.

"The rate of inflation in food pulled more dollars away from GM than we expected as customers needed to pay for the inflation in food. We like the fact that our inventory is up because so much of it is needed...but a 32% increase is higher than we want. We'll work through most or all of the excess inventory over the next couple of quarters," he shared.

Target had a similar problem with customers buying different items than what the company had forecast.

"More specifically, we saw a much higher than expected rate in transportation costs and a more dramatic change in our sales mix than we anticipate. This resulted in excess inventory, much of it in bulky categories, which put additional strain on an already stretched supply chain," CEO Brian Cornell said during his chain's first-quarter earnings call.

Cornell noted that the change in consumer spending was more broad than Target had expected.

"While we anticipated a post-stimulus slowdown in these categories, and we expect the consumers to continue refocusing their spending away from goods and services, we didn't anticipate the magnitude of that shift," he said. "As I mentioned earlier, this led us to carry too much inventory, particularly in bulky categories, including kitchen appliances, TVs, and outdoor furniture. And with very little slack capacity after two years of unprecedented growth, we faced elevated costs to store and indicated rightsizing our inventory position. Nevertheless, we're still seeing healthy overall spending, I guess, even as their spending continues to evolve."

How Are Walmart and Target Handling Excess Inventory?

"We started being aggressive with rollbacks in apparel, for example, during Q1. Even with reduced prices, the apparel margin can still be helpful to our overall mix," McMillon said.

Target Chief Growth Officer Christina Hennington explained that the chain had been careful, but it still had to make some very difficult choices.

"Despite this careful approach, the mix of actual demand materialized differently than we had anticipated. In addition, as supply grew and demand shifted away from bigger, bulkier products like furniture, TVs and more, we needed to make difficult trade-off decisions," she said. "We could keep this product knowing would sell over time or we could make room for fast-growing categories, like food and beverage, beauty and personal care, and household essentials."

Target chose to use discounts to sell off some its bulkier items rather than store them. 

To preserve the quality of on-shelf presentations and support the guest experience, we chose the latter, leading to incremental markdowns that reduced our gross margin," she said. "While these were difficult decisions, we believe they'll pay off in the long term, given that building long-term loyalty remains our top priority."

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Watch Yield Curve For When Stocks Begin To Price Recession Risk

Watch Yield Curve For When Stocks Begin To Price Recession Risk

Authored by Simon White, Bloomberg macro strategist,

US large-cap indices…

Published

21 mins ago

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May 31, 2023

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Watch Yield Curve For When Stocks Begin To Price Recession Risk

Authored by Simon White, Bloomberg macro strategist,

US large-cap indices are currently diverging from recessionary leading economic data. However, a decisive steepening in the yield curve leaves growth stocks and therefore the overall index facing lower prices.

Leading economic data has been signalling a recession for several months. Typically stocks closely follow the ratio between leading and coincident economic data.

As the chart below shows, equities have recently emphatically diverged from the ratio, indicating they are supremely indifferent to very high US recession risk.

What gives? Much of the recent outperformance of the S&P has been driven by a tiny number of tech stocks. The top five S&P stocks’ mean return this year is over 60% versus 0% for the average return of the remaining 498 stocks.

The belief that generative AI is imminently about to radically change the economy and that Nvidia especially is positioned to benefit from this has been behind much of this narrow leadership.

Regardless on your views whether this is overdone or not, it has re-established growth’s dominance over value. Energy had been spearheading the value trade up until around March, but since then tech –- the vessel for many of the largest growth stocks –- has been leading the S&P higher.

The yield curve’s behaviour will be key to watch for a reversion of this trend, and therefore a heightened risk of S&P 500 underperformance. Growth stocks tend to outperform value stocks when the curve flattens. This is because growth companies often have a relative advantage over typically smaller value firms by being able to borrow for longer terms. And vice-versa when the curve steepens, growth firms lose this relative advantage and tend to underperform.

The chart below shows the relationship, which was disrupted through the pandemic. Nonetheless, if it re-establishes itself then the curve beginning to durably re-steepen would be a sign growth stocks will start to underperform again, taking the index lower in the process.

Equivalently, a re-acceleration in US inflation (whose timing depends on China’s halting recovery) is more likely to put steepening pressure on the curve as the Fed has to balance economic growth more with inflation risks. Given the growth segment’s outperformance is an indication of the market’s intensely relaxed attitude to inflation, its resurgence would be a high risk for sending growth stocks lower.

Tyler Durden Wed, 05/31/2023 - 13:20

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US Job Openings Unexpectedly Soar Above Highest Estimate Even As Number Of Quits Tumble

US Job Openings Unexpectedly Soar Above Highest Estimate Even As Number Of Quits Tumble

For those following the recent sharp drop in job openings,…

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21 mins ago

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May 31, 2023

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US Job Openings Unexpectedly Soar Above Highest Estimate Even As Number Of Quits Tumble

For those following the recent sharp drop in job openings, or perhaps merely fascinated by the narrative that AI will cause a margin-busting corporate revolution as millions of mid-level employees are replaced by a cheap "bullshitting" AI algorithm, then today's latest bizarro JOLTS report will come as a shock. That's because after three months of sharp declines, the BLS reported that in April the number of job openings soared by 358K from an upward revised 9.7 million to 10.1 million, the biggest increase since Dec 2022...

.... and printing not only above the median consensus which expected the trend to continue with 9.4 million job openings this month, but came higher than the highest Wall Street estimate! As shown in the chart below, the delta to median consensus print was a whopping 703K.

According to the BLS, the biggest increase in job openings was in retail trade (+209,000); health care and social assistance (+185,000); and transportation, warehousing, and utilities (+154,000)

The sudden, bizarre reversal in the job openings trend, meant that after falling to the lowest level since Sept 2021, in April the number of job openings was 4.446 million more than the number of unemployed workers, the highest since January.

Said otherwise, after dropping to just 1.64 job openings for every unemployed worker, the lowest since Nov 2021, in April there were 1.79 openings for every worker, a sharp spike back to levels that the Fed does not want to see.

To be sure, none of the above data are credible for reasons we have discussed before but the simplest one is because the response rate of the JOLTS survey is stuck at a record low 31%. Which means that only those who actually have job openings to report do so, while two-thirds of employers are either non-responsive or their mail is quietly lost in the mail.

Another reason why today's data is meaningless is that even as employers allegedly put up many more job wanted signs, the number of workers actually quitting their jobs - a proxy for those who believe they can get a better-paying job elsewhere, and thus strength of the overall job market - tumbled by 129K to 3.8 million, the lowest number since May 2021.

Even the Fed's WSJ mouthpiece Nick Timiraos ignored the stellar headline print, and instead focused on the plunge in quits, writing that the "rate of workers who are voluntarily leaving their jobs (including leisure and hospitality) is returning closer to pre-pandemic levels, a possible sign of less tight labor markets. Quits tend to rise when workers think they can receive better pay by changing jobs."

And the biggest paradox: as pointed out by Peter Tchir of Academy Securities, the seasonally adjusted JOLTS quits rate was 2.4 (we reached a "peak" of 2.4 in July 2019), while the Hires rate (also seasonally adjusted) was 3.9% just like it was 3.9 in July 2019. So allegedly there are 3,000,000 more jobs available now than then.

So what to make of this bizarro, conflicting report?

Well, after three months of drops in job openings, at a time when it is especially critical for Biden to still maintain the illusion that at least the labor market remains strong when everything else in the senile president's economy is crashing and burning, it appears that the BLS got a tap on the shoulder once again, especially when considering that the one category that will be most impacted by ChatGPT and which according to Indeed is seeing a collapse in job postings was also the one category that had the highest number of job openings.

Tyler Durden Wed, 05/31/2023 - 10:35

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COVID-19 lockdowns linked to less accurate recollection of event timing

Participants in a survey study made a relatively high number of errors when asked to recollect the timing of major events that took place in 2021, providing…

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50 mins ago

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May 31, 2023

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Participants in a survey study made a relatively high number of errors when asked to recollect the timing of major events that took place in 2021, providing new insights into how COVID-19 lockdowns impacted perception of time. Daria Pawlak and Arash Sahraie of the University of Aberdeen, UK, present these findings in the open-access journal PLOS ONE on May 31, 2023.

Credit: Arianna Sahraie Photography, CC-BY 4.0 (https://creativecommons.org/licenses/by/4.0/)

Participants in a survey study made a relatively high number of errors when asked to recollect the timing of major events that took place in 2021, providing new insights into how COVID-19 lockdowns impacted perception of time. Daria Pawlak and Arash Sahraie of the University of Aberdeen, UK, present these findings in the open-access journal PLOS ONE on May 31, 2023.

Remembering when past events occurred becomes more difficult as more time passes. In addition, people’s activities and emotions can influence their perception of the passage of time. The social isolation resulting from COVID-19 lockdowns significantly impacted people’s activities and emotions, and prior research has shown that the pandemic triggered distortions in people’s perception of time.

Inspired by that earlier research and clinical reports that patients have become less able to report accurate timelines of their medical conditions, Pawlak and Sahraie set out to deepen understanding of the pandemic’s impact on time perception.

In May 2022, the researchers conducted an online survey in which they asked 277 participants to give the year in which several notable recent events occurred, such as when Brexit was finalized or when Meghan Markle joined the British royal family. Participants also completed standard evaluations for factors related to mental health, including levels of boredom, depression, and resilience.

As expected, participants’ recollection of events that occurred further in the past was less accurate. However, their perception of the timing of events that occurred in 2021—one year prior to the survey—was just an inaccurate as for events that occurred three to four years earlier. In other words, many participants had difficulty recalling the timing of events coinciding with COVID-19 lockdowns.

Additionally, participants who made more errors in event timing were also more likely to show greater levels of depression, anxiety, and physical mental demands during the pandemic, but had less resilience. Boredom was not significantly associated with timeline accuracy.

These findings are similar to those previously reported for prison inmates. The authors suggest that accurate recollection of event timing requires “anchoring” life events, such as birthday celebrations and vacations, which were lacking during COVID-19 lockdowns.

The authors add: “Our paper reports on altered timescapes during the pandemic. In a landscape, if features are not clearly discernible, it is harder to place objects/yourself in relation to other features. Restrictions imposed during the pandemic have impoverished our timescape, affecting the perception of event timelines. We can recall that events happened, we just don’t remember when.

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In your coverage please use this URL to provide access to the freely available article in PLOS ONE: https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0278250

Citation: Pawlak DA, Sahraie A (2023) Lost time: Perception of events timeline affected by the COVID pandemic. PLoS ONE 18(5): e0278250. https://doi.org/10.1371/journal.pone.0278250

Author Countries: UK

Funding: The authors received no specific funding for this work.

Journal

PLoS ONE

DOI

10.1371/journal.pone.0278250

Method of Research

Survey

Subject of Research

Not applicable

Article Title

Lost time: Perception of events timeline affected by the COVID pandemic

Article Publication Date

31-May-2023

COI Statement

The authors have declared that no competing interests exist.

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