Retail Tales Tell a Sad Story about the Economy

December is supposed to be the month when retails sales flourish. Instead, retail sales came in way below expectations. Retailers were left with warehouses full of overstock, and this situation has been dragging on for about a year now with little sign that it is getting any better.

Consensus expected a headline decline of 0.9% MoM…. The headline retail sales print for December tumbled 1.1% MoM – the biggest monthly drop since July 2021 and second straight monthly drop

Zero Hedge

Both brick-and-mortar and online stores took the hit.

On a year-on-year basis, retail sales were flat … or appeared to be, but let me dig into that once again.

You may remember that on January 6, I wrote,

You may have actually heard news that touted holiday retail sales as being strong. I know I did, but that was a veiled lie that requires digging deeper. As I’ve noted before, retails sales are measured in dollars. The growth in sales was due entirely to inflation in prices/devaluation of the dollar. Factor out the hot inflation that made retail seem good year-over-year, and you have a REAL decline in sales during the holiday season.

To understand how news of surface-level rises in retail can actually mask sales that are dropping, one has to look at inflation. Inflation forces one to look beneath the surface of all reports these days that are measured in dollars to see how much of what is being reported is just inflation that hasn’t been adjusted out of the numbers. The fact is, retailers not only sold fewer items, but they made a lot less money (in profits) because they had to offer a lot more incentives to get those sales.

It’s Worse Than it Looks: Beneath the Surface the Bottom is Falling Out, and People are Jumping out of Windows

The same thing applies again, those flat YoY comparisons are actually deeply negative as soon as you adjust inflation out. I noted in that recent article how financial reporting sugar-coats the bad news, quoting first from Yahoo as a demonstration!

U.S. online spending during the 2022 holiday season rose by a better-than-expected 3.5%, a report by Adobe Analytics showed, as retailers used hefty discounts to lure inflation-weary consumers into spending on everything from toys to electronics.

Shoppers spent a record $211.7 billion online over the holiday season.

While U.S. online holiday sales rose, it grew at the slowest pace as consumers felt the brunt of rising prices.

Yahoo!

It didn’t actually grow at all. The article effectively lied, so I noted what the Yahoo! article doesn’t say:

It doesn’t say that sales did not rise AT ALL, but actually FELL, if you factor that inflation back out of the prices sales are measured in — the same inflation that made even the surface-level (unadjusted) growth “slow” as consumers felt the brunt. What we really had was slow HEADLINE growth, which translated to sharply declining REAL growth because consumers dialed back purchases. On top of that, retailers made lower margins on what little they did sell because they had to offer steep price discounts from the manufacturers’ highly inflated price recommendations. This all means they may have actually taken losses to get that higher dollar value in total sales. (“We’re losing money on every item sold, but we’re making it up on volume!”)

It was the third-worst week for retail in history!

Well, today we also got news that proves all of that out if we take a closer look at one component of retail (one of the biggest components during December) — toy sales:

The holidays ushered in historic bargain prices on toys – and 2023 promises even deeper discounts for consumers while delivering more pain for toy sellers….

“For the first half of the year, if not the entire year, toys will continue to be deeply discounted and toy makers’ profit margins will shrink drastically,” said Isaac Larian, chief executive of MGA Entertainment, maker of LOL Surprise and Bratz dolls….

The New York Post

And here we were delivered proof of the inflation factor as well:

Overall sales revenue from toys increased 3% in 2022 from January to September while the number of toys sold decreased by 3% over the same period of time, according to NPD.

Yes, the increase in revenue was just counting inflation because the actual number of items sold was lower. I pointed the same thing out last spring when I noted the significant misrepresentation in how things are reported and stated that one has to dig beneath the surface to get the truth:

Things get a little dicier as you look behind the retail veil…. Now I’m going to show you where the bodies are buried in this retail apocalypse even though revenue was reported as seeing positive growth, which investors liked until they turned over a little earth and looked beneath the surface. Turns out the revenue growth reported by corporations like Walmart and Target was actually all about inflation. The numbers are not inflation-adjusted….

Here is the short of it all added up: Consumers bought a little more stuff and paid a lot more for it, so consumer spending went up even more than inflation. Thus, retail revenue went up; however, it did not even go up as much as consumer inflation (up 4% by Target, 2% by Walmart). That means retailers sold more stuff (given the growth we see on the consumer-spending side), but they made a lot less money on it.

The Retail Apocalypse was Bloodier than it Looked

Back then, there was some improvement on the surface in the numbers being reported. This time, however, even the headline numbers have gone down. Last time, when the unadjusted numbers went up, that happened during a quarter when GDP went down. This time, even the raw revenue numbers went down — way down. So what does that tell you about what should be happening in GDP in the last quarter — at least in the retail component?

If nominal sales sank this much in December with the help of inflation, you can readily do the math to figure out how much worse they are after you adjust for inflation; but the facts get worse: Many of those sales would not have happened at all, especially in toys, without massive price-slashing or other forms of discounts.

That’s a precipitous drop from pandemic years when toy sales grew by 22% year-over-year in 2020 and by 12% in 2021.

Toy prices, which typically rise after Black Friday because popular items become scarce, actually declined another 10% through Dec. 23, according Linda Bolton Weiser, an analyst for investment bank DA Davidson.

The New York Post

So, the prices took a steep cut, but the dollars the total is measure in are still not adjusted for a real (constant) dollar value. If you drop the sales price from $100 to $90, you still have to factor in that the $90 is worth ~7.5% less than it was a year ago. Dropping the price doesn’t factor out inflation on the remainder of the price.

MGA saw its holiday sales decline by about 10%, the first drop in six years…. The steep discounting began in early November, or much earlier than usual….

While online toy sales grew by 206% from Nov. 1 to Dec. 31 compared to a year ago, the industry had to rely on deep discounts, reaching a markdown peak of 34% off compared to 19% last year, to sell its holiday haul….

Toys were more deeply discounted than any other category of merchandise. Electronics had the second highest markdowns with an average 25% discount, according to Adobe.

Note that the big increase in online sales was just for toys. Overall, online sales fell 1.1%.

On top of all this, holiday operating costs were higher due to wage inflation at a time when it is already typically hard to get enough holiday help. Therefore, profits must have really gone south.

“This will be a tough, challenging year, certainly the first half,” said Jay Foreman, chief executive of Boca Raton, Fla.-based Basic Fun toys.

An all this huge discounts still left inventories bloated:

“We have a lot of extra inventory now, but we expect it to be gone by the second half of the year, and anecdotally I’d say [the big retailers] will have a little bit more than they had hoped for,” Foreman said.

They were saying that eight months ago. Being left with bloated inventories, retailers are cutting back on purchases, and manufacturers are cutting back on production, creating a backward effect throughout the overall economy.

In its latest “Beige Book,” conveying corporate reports from December, the Fed said,

Many retailers noted increased difficulty in passing through cost increases, suggesting greater price sensitivity on the part of consumers [and] some retailers offered more discounts and promotions than they had a year ago in order to move merchandise and clear out excess inventories….

Zero Hedge

Clear back last spring I noted the significance of this inventory-and-inflation problem:

Soaring costs and swollen inventories have retailers on the ropes, and investors fear that the punishment won’t ease anytime soon.

The Retail Apocalypse was Bloodier than it Looked

More than half a year later it has hardly eased at all. Inflation is still wrenching the economy and the stock market like it was back then, and inventories are still grossly overstocked, even with the blowout sales I said way back then might well be coming:

Some analysts have speculated those swollen inventories will cause price reductions in order to have inventory blowout sales because of the cost of soaring inventory. That is part of their basis of hope for thinking inflation will now back off….

However, it’s clear that making those cuts will mean making even less in profit margins on items they’ve already bought at greater inflation rates than they’ve passed along (and likely less in earnings per share) in the next quarter. Selling what they did at the price they did already wounded retailers badly with investors when they did not pass along the full increase in their cost of goods sold or their operating expenses….

That is why retailers are on the ropes. If they lower prices to blow out some of that inventory, they may lose more interested stock investors, so their stock values may fall further….

They’re caught in the crush now between rebelling investors and rebelling customers. There is simply no assurance that works out nicely. That is one reason why this high inflation can rip an economy to shreds and the stock market to shreds at the same time, as I warned last year it would do. Now, we’re seeing how that plays out in real time.

And it’s still playing out in stocks today! I reported it as a “an absolute bloodbath for retail” in the stock market back then:

a disastrous few days that sent giants like Walmart Inc. and Target Corp. to their worst stock-price drops since 1987.

That was when the S&P first hit bear-market territory, and it still looks like a bloodbath in stocks today, too, even though the S&P sits lower today than it did back then, and the ride continues to be just a rough.

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