May 12, 2022

Q1 2022 Retail Preview: Inflation and Supply Chain Problems Create a Perfect Storm

by Jharonne Martis.

Even as supply chain disruptions continue to weigh on retailers, the impact of soaring inflation is taking a toll on consumers’ willingness to buy, much less to pay top dollar. Shoppers feeling the pinch are looking for value and starting to trim their discretionary spending. A case in point: as Netflix boosted its prices, the company reported cost-conscious consumers simply axed their subscriptions. There seems to be no end in sight to the pain, as disruptions to trade in the Black Sea region are affecting food supplies, creating shortages and putting upward pressure on global prices of key commodities.

EBITDA margins

In addition to rampant inflation in the price of grain and other foodstuffs, the markets are seeing a major supply shortfall of cooking oils, including sunflower and palm oils, that is causing their prices to surge as well. (The interruption of supplies from the Black Sea region is contributing to the dearth of sunflower oil, in particular.) Indonesia, the world’s largest exporter of palm oil, has imposed tougher regulations governing palm oil exports. That could mean that prices of everything from your favorite soap and shampoo to snack food staples like Oreo cookies, also climb further.

Palm oil is an essential raw material on which the world’s largest consumer goods conglomerates like Procter & Gamble rely to meet demand for their products. In its most recent earnings call, Proctor & Gamble warned investors that “based on the current spot prices, we now estimate a $2.5 million after-tax commodity cost headwind in fiscal ’22.” It’s not just palm oil that is creating a problem for Proctor & Gamble. ”Since our last update, we’ve seen continued cost increases in nearly every type of material we use and in diesel and in natural gas,” the company said during the call. “Freight costs have continued to increase. We now expect freight and transportation costs to be a $400 million after-tax headwind in fiscal ’22 (Source: Procter & Gamble Q2 2022 Earnings Call).

Supply shortfalls and rising freight costs are delivering a huge hit to the company’s profitability. Procter & Gamble’s EBITDA margin is on track to decline for a third quarter in a row, falling to 23.6% in the current quarter ending June 2022, according to Refinitiv I/B/E/S estimates (Exhibit 1).

Exhibit 1:  Procter & Gamble EBITDA Margin

Source: Refinitiv I/B/E/S

Guidance

Other retailers are delivering similar warnings as they report their earnings for Q1 2022. So far,113 retailers have reported Q1 earnings; of this group, 102 mentioned inflation and 110 flagged supply chain issues.

In addition to the 24 negative preannouncements and ten positive EPS forecasts in Q12022, 31 retailers posted negative revenue outlooks while 27 offered a positive outlook for revenue (Exhibit 2). The bulk of the Q1 2022 negative guidance (33.3%) has come from the specialty retail sector.

Looking ahead to Q2 2022, 15 retailers issued negative preannouncements, while six issues positive EPS guidance. Of those retailers offering revenue guidance, 14 warned of disappointing results, while 10 said revenue might be better than previously expected. The bulk of Q2 2022 EPS negative guidance (40%) came from the household durables retail sector.

Exhibit 2: Earnings and Revenue Guidance: Q1 2022 And Q2 2022

Source: Refinitiv I/B/E/S

Q1 2022 earnings

The Refinitiv U.S. Retail and Restaurant Q1 earnings index, which tracks changes in the growth rate of earnings within the sector, is expected to decline by 18.0% over last year’s levels. Of the 204 retailers tracked by Refinitiv, the Hotels, Restaurant & Leisure sector recorded the highest earnings growth rate in the first quarter, recording a 144.4% surge over last year’s level.

To put those results in context, it’s important to note that the pandemic’s spread meant that this sector remained mostly closed last year and accordingly reported weak results. That means these companies are facing easy comparisons over year-ago levels. The second strongest sector, the Distributors, had a Q1 earnings growth rate of 26.1% (Exhibit 3). At the other end of the spectrum, Internet & Catalog Retail is facing difficult comparisons and has the weakest anticipated Q1 2022 estimate, with profits expected to decline by 134.1%.

Exhibit 3: The Refinitiv Retail Earnings Growth Rate – Q1 2022

Source: Refinitiv I/B/E/S

Within the Hotels, Restaurant & Leisure sector, Hilton Worldwide and Marriott International recorded the strongest earnings growth rates of 3450%, and 1150%, respectively. Of the 45 companies in this group, 29 are on track to post earnings growth rates in the double digits or even higher Q1. In addition to the easy-to-beat year-over-year comparisons, these firms have begun to benefit from the fact that consumers feel more comfortable traveling, staying at hotels and eating out.

In contrast to the easy comparisons that hotels and leisure firms faced, the Internet & Catalog Retail group is hampered by difficult year-over-year earnings comparisons. Negative growth expectations are directly responsible for the forecast decline in the overall earnings growth rate within the group, as four of the six companies struggle to match pandemic-level earnings growth levels. During the pandemic, consumers gravitated to online retailers such as Amazon. The Internet behemoth reported a 147.9% decline in earnings growth in the first quarter of the year; Etsy, meanwhile, has an estimated earnings decline of 40%.

So far, 113 companies or 55% of those in our Retail/Restaurant Index, have reported earnings for Q1 2022. Of this group, 72% announced earnings that exceeded analysts’ expectations, while 4% matched those forecasts and the remaining 24% reported earnings that fell below analysts’ predictions (Exhibit 4). The blended earnings growth estimate for Q1 2022 is -18%.

To date, 120 companies in the Retail/Restaurant index have reported revenue for Q1 2022. For this group, the Q1 2022 blended revenue growth estimate is 10.0%; 74% have reported revenue above analyst expectations, and 26% reported revenue below analyst expectations.

Exhibit 4: Refinitiv Proprietary Research Restaurant & Retail Dashboard – Q1 2022

Source: Refinitiv I/B/E/S

Retail sales

Same Store Sales (SSS) also are commonly referred to as Comparable Store Sales. However, it’s impossible to come up with any year in history that is at all comparable to those that retailers endured in 2020 and 2021. Never before had governments required retailers and other businesses to close their physical locations. As a result, several retailers didn’t report SSS and many companies ceased providing this guidance during most of the pandemic.

The Refinitiv Same Store Sales (SSS) index is expected to see a 4.2% gain in Q1 2022 (Exhibit 5). An increase of 3.0% in SSS signals that consumer spending is healthy. So, the forecast rises of 4.2% for SSS is robust, especially when considering the difficult comparison the index faces. Last year at this time, Q1 2021 SSS came in at a whopping 14.6%: the strongest SSS result recorded during the pandemic.

It’s very important to note that due to the pandemic, the 2022 results don’t offer an apples-to-apples comparison of current trends relative to previous years, as many retailers were closed due to shelter in place regulations.

Exhibit 5: Refinitiv Same Store Sales Index: 2017 – Present

Source: Refinitiv I/B/E/S

Even as higher food prices eat into their spending power, consumers also have had to grapple with rising gasoline prices. Within the retail space, several discounters sell gasoline and motorists are responding favorably to the competitive prices offered by this group. Costco already has beaten its 12.9% SSS estimate for Q1 2022, delivering instead a SSS gain of 14.4%. Costco even beat the SSS gain of 13.0% recorded last year.

At a time when economists are predicting that discretionary spending by consumers is likely to decline, analysts polled by Refinitiv remain bullish on discounters — and not just because consumers are trading down in search of lower prices. Since the end of January, analysts polled by Refinitiv have been boosting their estimates for these discounters for Q1 2022. In January, analysts had predicted that SSS at Sam’s Club (including fuel) would rise 4.8% in Q1; by March, those analysts had revised their forecast upward to 6.0%.  Analysts covering Costco Wholesale, and BJ’s Wholesale similarly adjusted SSS estimates (including fuel) upward. For the most part, discounters that don’t sell fuel have failed to keep pace; analysts are looking for weaker SSS results for Q1 2022.

Although it faces the easiest SSS comparison within this group over year-ago levels, analysts still expect Dollar General to report a dip in SSS of 1.4% in Q1 (Exhibit 6). The discounter targets low-income consumers, a group that this year no longer is able to count on extra spending power thanks to government stimulus checks.

The double-digit forecast growth in comparative sales at Ralph Lauren don’t offer investors and analysts a true indication of organic growth at that retailer. Mall stores, including apparel retailers and department stores, had been struggling with weak traffic even before the coronavirus pandemic forced most to shut their doors in the spring of 2020; now, they remain the most vulnerable to seeing underwhelming SSS growth. For now, at least, last year’s SSS results are easy to beat, making comparative store sales look relatively robust, and most of the retailers in the group boast double-digit Q1 2022 SSS estimates (Exhibit 6).

Still, some retailers that witnessed decent SSS a year ago remain on track to better their performance for Q1 2022. Express is on track to report a gain of 27.1% in SSS, well above last year’s result of 5.0%. Walmart, in the face of a hard-to-match comparative SSS from last year, is on track to post a healthy 2.7% gain in SSS.

Exhibit 6: Retailers facing easy SSS comparisons: Q1 2021 Actual vs. Q1 2022 Estimate

Source: Refinitiv I/B/E/S

Some of the pandemic’s outperformers continue to deliver strong gains in SSS in the early months of 2022. Despite facing difficult SSS comparisons, this group is posting robust SSS growth estimates for Q1 2022.

A few standouts within this select company are Lovesac, Express, and Crocs. The latter, a shoemaker, posted an impressive 71.1% SSS gain in Q1 2021 as customers gravitated to comfort during the pandemic, and is on track to follow that by reporting a 20.3% SSS increase in Q1 2022 as consumers cling to that preference.

Consumers also remain willing to spend to improve their stay-at-home experience, reflected in the results of the Home category (Exhibit 7). This group includes two companies facing some of the most difficult year-over-year comparisons. Topping that list is Lovesac, facing a difficult comparison of 48.8%– and still  expected to post double digit Q1 SSS gains with a 27.6% Q1 SSS estimate. Similarly, the estimate for SSS growth at Williams Sonoma is 1.7%; that comes on top of last year’s robust 40.4% SSS result.

Other firms follow this pattern. TJX, Macy’s and DWS have very difficult comparisons but nevertheless all are on track to post double-digit comps for the first quarter of 2022 of 14.4%, 14.5% and 18.3% SSS, respectively.

In spite of the difficult comparisons, discounters demonstrate their ability to maintain business volume. Target is on track to report 0.4% SSS, on top of a robust 22.9% SSS growth last year. In normal times, a 0.4% SSS would signal only modest business growth, but in the case of Target’s very difficult SSS comparison over year-ago levels, it’s a sign that the retailer’s business is holding up well.

Exhibit 7: Retailers facing difficult SSS comparisons: Q1 2021 Actual vs. Q1 2022 Estimate  

Source: I/B/E/S data from Refinitiv

Restaurant Same Store Sales

The Refinitiv Restaurant Same Store Sales (SSS) index nosedived into negative territory in 2020, hitting a record low in Q2 2020. Since then, the picture has improved and the index is expected to see a robust 9.5% growth in SSS in Q1 2022, in spite of the difficult comparison offered by an 8.7% gain in SSS last year. (Exhibit 8).

It’s important to note that, once again, the 2020-2021 results don’t offer an apples-to-apples comparison over previous years, given that quarantine rules and other pandemic restrictions forced many restaurants to close. As a result, a number of restaurants didn’t report SSS data during the pandemic.

Exhibit 8: Refinitiv Restaurant Same Store Sales Index: 2019 – Present

Source: I/B/E/S data from Refinitiv

Thanks to social distancing, Dave & Buster’s took the biggest beating of all the restaurants in this group last year, recording a decline in SSS (Exhibit 9). This makes this year’s comparison very easy, and the chain restaurant is on track to post 61.6% growth in SSS for Q1 2022. Several other restaurant businesses also are on track to post double-digit comps, thanks to similarly easy-to-beat results from last year. Brinker International and Bloomin’ Brands beat their comp estimates with gains in SSS of 13.5% and 14.0%, respectively.

Exhibit 9: Restaurants facing easy SSS comparisons: Q1 2021 Actuals vs. Q1 2022 Estimates

Source: I/B/E/S data from Refinitiv

Within this category, CBR Group faced the most difficult comparison. Last year, it recorded a SSS gain of 56.5% for the first quarter; this year, it still has a robust SSS growth estimate of 13.5%. Strong online sales from a year ago boosted results at Wingstop, Papa John’s International and Domino’s Pizza (Exhibit 12). Carry-out and delivery traditionally account for a big portion of these companies’ revenue and have remained in high demand throughout the pandemic. Quick service dining companies also continue to perform well.

Exhibit 10: Restaurants Facing Difficult Same Store Sales Estimates/Actuals: Q1 2022

Source: I/B/E/S data from Refinitiv

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