In this series of Supply Chain Matters blog commentaries, we are surveying the recent financial and operational performance of some bellwether companies’ indicative of industry product demand and supply networks trending.  Our goal is to share indicators of how certain industries, companies and customers are faring during this unprecedented 2021 global supply chain surge.

Our first blog in this series we highlighted the financial and operational performance of Samsung Electronics and Apple, both being very indicative of high-tech and consumer electronics product demand and supply network trending and supply chain challenges.

Part Two in this series focused on A.P. Moeller Maersk, operators of the leading ranked global container shipping line which experienced its strongest financial performance quarter in the shipping firm’s 117-year history. We subsequently added global shipping line Hapag-Lloyd which reported EBIT of $1.5 billion in the shipping line’s latest quarter, more profitability than all of 2020 quarters combined.

Part Three was focused on the commercial aircraft industry, the linchpin of global trade and supply networks, and an industry that has been reeled by the impacts of the COVID-19 pandemic on passenger air travel and consequent new aircraft demand. Our focus was on the duopoly of Airbus and Boeing, and how they are faring financially and operationally after the first quarter of 2021.

In this Part Four blog, we focus on influential U.S. retailers representing broad consumer segments to hone-in on the current level of retail spending and end consumer demand.

Retail industry supply chain performance

Broadline Grocery and Consumer Goods Retailers

Two bellwether U.S. retailers that many watch are Target and Walmart.

For its fiscal first quarter ending April 30, Target Corp. reported total revenue growth of 23 percent to $24.2 billion. Quarterly earnings of $2.1 billion were considerably up from the $284 million in earnings in the year-earlier period when physical store shopping was restricted due to the initial impacts of the pandemic.

Comparable same store and digital channel sales reportedly rose 23 percent over the year-earlier quarter, nearly double that when pandemic lockdown was occurring. Overall sales via digital channels reportedly increased 50 percent, below the 141 percent increase in the year-earlier quarter in 2020. Physical store visits however, rose 17 percent year-over-year as consumers had pent-up needs to experience physical shopping as the COVID-19 infection rates across the U.S. subside. Gains were recorded in in hard-line goods, apparel and home goods while sales of food and grocery items reportedly increased a few percentage points. Target CEO Brian Connell indicated to analysts that as vaccination rates increase across the U.S., and with consumers increasingly more comfortable in venturing outside, the retailer observed an enthusiastic return to in-store shopping.

Rival Walmart reported what was headlined as better-than-expected results for its latest quarter, however analysts were sensitive to a slower pace of growth from earlier quarters. Total global revenues rose 2.7 percent to $138.3 billion for the quarter ending on April 30. Net income reportedly decreased 32 percent to $2.7 billion and included loses incurred in the sale of Japanese and United Kingdom business units along with an adjustment in the value of an equity stake held in Chinese E-Commerce retail platform provider JD.com. Profitability was aided by lower COVID-19 related spending in the latest quarter.

Comparable sales from U.S. stores and digital channels reportedly rose 6 percent in the latest quarter, below the 10 percent reported in the year-earlier period.  U.S. online sales reportedly rose 37 percent, noted by analysts as the slowest growth rate since the pandemic outbreak in early 2020. The year earlier quarter had online sales growth of 74 percent.

Somewhat similar to Target, nonfood sales grew 20 percent, reportedly aided by government economic stimulus checks. In demand items were apparel, recreation, lawn and garden along with home improvement items. Grocery sales reportedly declined from the year-earlier period, another area of concern.

Walmart CEO Doug McMillon indicated to analysts that he anticipates continued pent-up shopping demand for the remainder of this year, and that the retailer’s optimism is higher than it was as the beginning of this year. The retailer has always benefited from government subsidy or stimulus actions.

 

Major Home Improvement Retailers

U.S. home improvement retailers Home Depot and Lowe’s both provided upbeat financial and operational performance in their latest financial reporting.

Home Depot CEO Craig Menear summed up the latest quarter: “As home values grow, people feel good about investing in their home overall. That alone, I think, is a very positive outlook for home improvement as you move forward.”

Total revenues rose 32 percent to $37.5 billion, compared with $28.2 billion in the year earlier quarter. Net profit was reported as $4.15 billion from $2.25 billion reported in the earlier quarter.  Comparable same store sales rose 31 percent.

Executives indicated that despite the currently exploding prices of lumber in the U.S., the product continues to stockout quickly among retail stores given the current level of home improvement demand. CFO Richard McPhail pointed to other supply chain disruptions and cost pressures, including costs of transportation, as continuing challenges for supporting existing consumer and contractor sales and volume growth.

Transactions over $1000 are also on the rise, rising by a reported 50 percent on a comparable basis. The retailer’s daily volume of customer transactions rose to just over 447 million in the latest quarter, from the level of 374.8 million in the year-earlier period.

This week, rival home improvement retailer Lowe’s Companies reported financial results for the quarter ending April 30 that was headlined with total quarterly sales growth of 23.8 percent to $24.4 billion. Net earnings were $2.3 billion, compared to $1.3 billion in the year-earlier quarter. Comparable sales growth for the U.S. was 24.4 percent. Executives noted that sales growth in Canada exceeded that of the U.S. in the latest quarter.

Revenue growth was reportedly driven by lumber, kitchen and bath and home décor items. Lowe’s has been pursuing a strategy to cater more to professional building contractor needs, and executives noted positive growth in this particular sector, hence the high volume of lumber related sales. Regarding online growth, executives indicated a two-year growth rate of 146 percent for lowes.com.

The home improvement retailer has also been aggressively investing in added store efficiency and productivity, including mobile check-out devices, automated customer checkout stations and the rollout of a freight tracking application that can track and predict the arrival of inbound inventory to individual retail stores.

Similar to Home Depot, Lowe’s executives indicated that underlying drivers of home improvement demand appear to be more resilient and stable than originally forecasted and feel that will continue for the remainder of the year.  That stated, both DYI retailers continue to closely collaborate with suppliers and logistics providers to ensure timely inventory replenishment flow and to buffer cost increases as much as possible. Thus far, both have done well, considering the level and scope of challenges.

 

Added Supply Chain Matters Perspectives

Obviously, the U.S. is further along in overall vaccination efforts and in opening up parts of the economy including businesses and retail stores. Thus, as many industry news outlets have observed, the current surge of demand and added transportation volume among industry global supply networks stems a lot from U.S. consumer and small business demand levels. At some point this year, Europe based demand should follow when more populations become vaccinated.

We sense a common COVID theme after the first quarter of 2021, that being demand focused on the very effects of the pandemic. That includes adding home office and extra rooms to residences, more exercising and meal preparation at-home, and spending monies that were saved during population lockdowns well people could not travel.

Entering this year, global economists were predicting an uptick in global demand by the second half of this year. In the U.S., that uptick is already underway. China remains in an economic boom, but consumer spending is reportedly still muted.

As for navigating the large numbers of supply chain or transportation disruptions, this sampling of retailers would indicate that while active mitigation efforts are ongoing, bottom line performance is good, in many cases exceptionally good.

The question remains whether inventory buying decisions and inventory arrival remain timely. Uncertain and yet to be determined is the bounce back of other regions such as Canada, Mexico, countries in Latin America and other global regions. That may take additional time.

Further rom our lens is that the key metric to monitor will be the retail industry inventory to sales ratio in the coming months.

Finally, it is always important in these times to reflect on what-if.

Consider that most of these major retailers invested in their online sales and customer fulfillment capabilities, in enhanced inventory planning and workforce productivity efforts, before and during the pandemic. Each of these major retailers anchored their online fulfillment capabilities from a store centric perspective. Imagine if they had not.

Bob Ferrari

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