U.S. domestic consumption has been on a roller coaster ride over the past three years. People have gone from not being free enough to spend practically-free money like there’s no tomorrow.
That, in turn, led to a not-so-transitory inflation, the hottest since the 1980s, forcing the Federal Reserve to implement ten successive interest-rate hikes in a little over a year to take the Fed funds rate to a target range of 5% to 5.25%.
While the consumer price index only grew by 4% year-over-year, which is the slowest in 2 years, the picture wasn’t as optimistic when volatile food and energy prices were excluded. The core CPI was still 5.3% over the previous year, indicating that consumers still find their budgets stretched.
With the stash of stimulus cash fast dwindling, average American consumers have been forced to rein in their urge to splurge to prevent inflation from biting harder. The Survey of Consumer Expectations for April by the New York Fed showed that the outlook for spending fell by half a percentage point to an annual rate of 5.2%, the lowest since September 2021.
This further explains why even a 0.4% recovery in retail sales for April, after two consecutive months of decline, still fell short of Dow Jones’ estimate of 0.8%.
We had discussed earlier the implications of this slowdown for mid-tier retailers and the prospects of the retail industry vis-à-vis travel and hospitality.
Given the fact that legacy retailers such as Bed Bath & Beyond Inc. couldn’t be rescued (and has subsequently filed for Chapter 11 on April 23), and retailers are encouraging gamified shopping on Livestream, we will look at a few embattled retail stocks in the context of the accelerated pace of store closures with the ascent of online retail.
On May 26, the Illinois-headquartered integrated healthcare, pharmacy, and retailing company Walgreens Boots Alliance, Inc. (WBA) announced its decision to slash its corporate staff by about 10% in an effort to streamline operations.
The second-largest pharmacy store in the United States has been around since 1901. However, the financial hardships it has faced during the pandemic resulted in lost market share, which the retailer has begun clawing back with acquisitions of healthcare services operator VillageMD and urgent-care provider Summit Health and the launch of initiatives, such as drone delivery.
However, the empowerment of each store to serve broader areas more remotely has come at the cost of a reduction in the total number of locations. In October, the company announced a slew of store closures across states, such as New York, Kentucky, Florida, Massachusetts, and Colorado.
WBA’s stock has lost more than 22% of its value over the past six months, relative to an almost 9% gain for the S&P 500 over the same period.
Diversified health solutions company CVS Health Corporation (CVS) has been busy aligning itself with the pandemic-catalyzed trend of patients using digital technologies to manage their health. To this end, the retailer has acquired the well-known home healthcare agency Signify Health to further its medication delivery reach.
However, this reorganization has also been accompanied by store closures. While the economic stagnation caused by the pandemic caused CVS to lose over 20 stores towards the end of 2021, the company has since decided to proactively close 300 locations each year for the next three years as it hones in on digital strategy and implements a "new retail footprint strategy aligned to evolving consumer needs."
With the strategic realignment yet to bear fruit, store closures in Pennsylvania, North Carolina, Maryland, California, Florida, Texas, and Georgia, among other states, have also been accompanied by around 29% slump in CVS’ stock price, compared to 9% gain for the S&P 500.
The muted retail outlook discussed earlier has also been reflected in the first quarter earnings of Macy's, Inc. (M). Although the mid-tier retailer surpassed its earnings estimates for the quarter, a spring pullback has caused it to miss its revenue estimates and slash its top- and bottom-line guidance for the entire year.
Moreover, in February 2020, the retailer announced its three-year restructuring plan, pursuant to which it had decided to close 125 of “its least productive stores.” With closures in 2020, 2021, and 2022, M has, in the words of CEO Jeff Gennette, begun its ‘final stretch’ of store closures with four stores: one each in Los Angeles, California; Fort Collins, Colorado; Gaithersburg, Maryland; and Kaneohe, Hawaii.
Given the prevailing demand softness in the unfavorable macroeconomic environment, M expects sales of $22.8 billion to $23.2 billion for the year, down from a previous range of $23.7 billion to $24.2 billion, while expected earnings per share of $2.70 to $3.20 is a major reduction from the previous guidance of $3.67 to $4.11.
M stock has plummeted by around 24% over the past six months, compared to the S&P500’s 9% gain over the same period.
Games and entertainment retailer GameStop Corporation (GME) was at the center of an unprecedented hype created by retail investors on social media forums when money was practically free, and inflation was ‘transitory.’
The hype created by an army of amateur traders in 2021 had less to do with the fundamentals of the company and more to do with the excitement of trading and a desire to short-squeeze professional speculators who were betting against it.
With online gaming more a norm than an exception, GME, which has been around since the 1980s, has seen a dramatic decrease in sales, resulting in many stores closing down and the company’s decision to transition into an exclusively online retailer.
In the fiscal first quarter that ended April 29, GME reported revenue of $1.24 billion, down from $1.38 billion in the year-ago period. Sales in the United States, Canada, and Australia dropped by 16.4%, 18.5%, and 8.9%, respectively, compared to the year-earlier period. This coincided with CEO Matthew Furlong's sudden firing and Ryan Cohen's appointment as executive chairman.
Since many e-commerce platforms offer viable alternatives for purchasing merchandise and hardware sold by the company, it is unclear how GME, with its own platform and fleet of e-commerce stores, would be able to differentiate itself from other players in this space and find its path to profitability.
