More confirmation of rising inventories

Walmart just reported its latest quarterly earnings.

On Monday (July 26, 2022), the company said it needed more price cuts to pare inventories. The stock is trading 10% lower in the after-market.

“In May 2022, Walmart said it was sitting on over $60 billion of inventory at the end of the first quarter and promised “aggressive” price cuts on items such as apparel.”, said a Reuters report.

Inventories at general merchandise stores at the end of April were the highest since at least 2000, U.S. Census Bureau data showed.

My blog post on July 1, 2022 mentioned the risk of bloated inventories leading to discounting.

….while 6 weeks earlier, Reuters reported “Target Corp on Tuesday cut its quarterly profit margin forecast issued just weeks earlier, and said it would have to offer deeper discounts to clear inventory as decades-high inflation takes a toll on demand.”

Keep in mind that inventory turnover ratios are lagging indicators.

However, some perspective behind that large number of $60 billion of stock sitting in Walmart’s stores and warehouses actually equals 11% of Walmart’s revenue. Industry goals tend to aim for that ratio to sit between 5 and 10. 

Walmart’s is usually around 7.5% and the 11% is the same level the company saw in 2013.  

From a stock investors perspective, these types of announcements are also considered ‘good cleansing’ statements.

American companies and their management are good at doing this and taking decisive action.

European and Japanese executives tend to be more reluctant doing so.

Nevertheless, discounting is deflationary as are the lower (20%-40%) prices of many commodities already being seen over the past 2-3 months.

In turn, this will aid the moderation of interest rates, as I have alluded in this note written 4 days ago.

and perhaps this ‘designed’ mid-cycle slowdown culminates with this week’s Federal Reserve hike of 75 basis points, being considered a ‘dovish’ hike?

July 26, 2022

by Rob Zdravevski

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