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00:00I'm Caroline Hyde and welcome to Bloomberg triple take. where we take one key topic. and split it into three unique angles today we focus on retail sector led the rally during the sessions remain was just saying but it is not all smooth sailing throughout the day. Late trading gap shares tumbling off the missing pretty badly with that fiscal year earnings guidance pending a pretty mixed picture. The retail after the positive moves and Macy's and Dollar General remain. We're going to dig into it sort of hit the nail on the head. Is this about a department store that wins on a single name that doesn't. Yeah. I mean that's really the question that has to be answered here. We're going to talk a lot about the retail earnings that we've gotten over the last couple of weeks because remember yes last week everyone was tearing their hair out about Wal-Mart and Target. And then this week we got Nordstrom we got Macy's and it was great. And then of course you have a gap. You have Abercrombie and Fitch and then you sort of wonder what's going on. The whole question right now is the resiliency of consumer spending and more importantly the type of consumer out there that's buying here. Is there a difference here in economic levels. And then of course there's still the supply chain issues. These are real issues here. It's a big part of the reason why you're seeing a lot of wild inventory numbers. Some of those companies say they're building up the inventory on purpose. Some maybe they're just getting stuck with it. That could be the store for Gap. We just got those earnings a 34 percent jump in inventory in the most recent quarter year over year here. Why. That's the big question we have to hear out of them. But you take a look at the headline numbers. The comp sales were down 14 percent year over year. That was way worse than what the expectations were. And when you look at the individual brands with the Gap brand or the Old Navy brand that was down as well you did have some bright spots with Banana Republic as well as with the athletic brand. But overall those gross margins came in very light there 31 percent versus I estimate up about 35 percent. And Europe a year that was down about 760 basis points from where it was a year ago. And there's a response here right now in the market Caroline. Those shares down 13 percent in after hours trading. Amazing setup. And let's dig a little bit deeper as to really what the picture is that's being painted. John Edwards is with aspirin this U.S. consumer team leader and read these varying tea leaves for us because we're looking at American Eagle trading lower as it cuts its outlook. Look we see Gap obviously having a really painful trade off there. Is it execution. Is that Ulta beauty and the higher end have the right thing at the right price and a higher end consumer. Or is it that in certain businesses just aren't managing to navigate these storms well enough. Yeah it's a little of both but execution is definitely a problem a gap. They they have acknowledged that to some extent especially in their old navy unit which had been one of their big growth drivers. Now they are struggling with their mix of sizes and styles and just having trouble appealing to their traditional consumer. So Old Navy not helping Gap at all. The main gap brand suffering as well. As you mentioned Banana Republic doing well as that more affluent consumer stays in there. What this is what's also concerning here because the whole structure of the Gap business was that you had these different brands that all sort of appeal to a certain demographic there. And that is one sort of was doing poorly then at least he had the other to sort of fall back on. And we know Old Navy was really kind of the driver for this company and for the stock for quite a few years here I guess. Is that model I guess is it still sufficient or do they need completely need to really rethink that type of diversification. Well yeah I think they may have gotten maybe a tiny bit complacent in you know sort of letting things run along you know depending on Old Navy to shore things up on the somewhat lower end. You know they they've struggled a bit with Gap over the years as that sort of middle middle area has been less appealing to people. But you know they're just hitting an array of both internal and external problems. They mentioned China. They do have a lot of exposure there with the Gap brand in particular and with the continued Covid 0 policy there and lockdowns they're struggling there as well. So it's a lot of things hitting them at once some out of their control but some that they just need to take another look at how they're going to turn them around. John a major theme of this retail story has been these extremely high inventory levels. What do you actually do now that you have this kind of back log of material. Yeah it's a good question. And different companies are approaching it different ways. You know interestingly Macy's today noting that their inventory was up quite a bit actually said that in some ways it's going to be a positive because they want to make sure they're they're well positioned for the back to school and even the holiday period where they are concerned that. Supply chain problems we're going to might eat you know might eat into their into their inventory more than they wanted. So you know it's a problem but it's it's a problem that companies can approach in sort of different ways. Do you think overall the headwinds the inventory the supply chain. We're just going to get worse picture going forward and people expect downgrading as much as they can. Is the baby being thrown out with the bath. And what do you make of these. This guidance right here right now because we're still reeling from a tech company that after a month of its own earnings had to come back and re assess the market outlook and the macroeconomic headwinds. Do we think now that the reality is being shown in these numbers or is worst come. Yeah that's that's a good question. I mean I think there could be worse to come. You know a lot of a lot of companies you know the phrase that we've heard a lot this this earnings season is the back half of the year. A lot of companies looking with hope toward the back half of the year feeling like some of the supply chain issues are going to be worked through possibly the war in Ukraine comes to some kind of resolution. But all of those things are way up in the air. You know we can't count on that for sure. We can't count on inflation being meaningfully lower by then. You know it's not clear that China's Covid policies are going to change dramatically. So a lot of questions there. And so there's you know there's hope but they think they have to prepare for the worst as well. All right. John Edwards Bloomberg news editor here helping us break down Gap earnings and really trying to extrapolate kind of the broader retail sales picture and more importantly the health of the consumer that moves us from our first take now to our second take. And it is about those consumer headwinds tomorrow. We're going to get that PCR data the Fed's preferred gauge on inflation. And those numbers have of course been running way above the Fed's target of 2 percent for some time right now. Well let's bring Stephanie Aaronson into this conversation vice president and director of economic studies at the Brookings Institution. And she's spent a couple of decades over at the Fed helping them with economic projections. And you know I want to start off here Stephanie with this general idea of the health of the consumer. But how healthy does some do some of these spending numbers. Look when you are talking about at least headline CPI inflation that's at 8 percent. And P.S. whatever the PCI core which I think is right around 5 to 6 percent. I mean it's definitely the case that the higher inflation is cutting into consumer's disposable income. And we've seen that while there was a big burst in consumer spending over the last couple of quarters. It did start to slow in the latest readings. And the personal saving rate is down now which I think suggests there is going to be less impetus from consumer spending going forward. They're not going to borrow. Do you think Stephanie. And is there a concern that we start to see debt build full combat for individuals and the way in which they want to spend. I think it is a risk obviously that consumers could start to depend more on credit. But I think that there's also a lot of uncertainty in the environment right now and that's likely to make consumers more wary and hang back a bit stuffy. Chairman Powell has said this quote that I absolutely adore. Then he says that inflation expectations sometimes do half the job essentially from rate hikes the anticipation of it how much of the move or the perhaps pullback in spending. Are we seeing from the expectation of a recession as opposed to actual evidence. I think that some of it is due to the expectations but a lot of it is actually due to the fact that we've already seen a substantial amount of financial tightening just as a result of the forward guidance that the Fed has been providing about their likely rate hike. So we've seen already that interest rates have been rising. That's going to damp consumer spending. The stock market is clearly down. So we're going to get smaller spending out of well. So I think some of it is about expectations but some of it is about markets already having incorporated a lot of the information about where the economy is going to go due to the change in monetary policy. But then a lot of those are the inflationary pressures that we have out there at least by Jay Power's own admission have been a result of some of the supply side issues that he seems to say can't necessarily be rectified by raising rates alone here. So I'm wondering where's the balance here. I mean they could tamp down demand but do they have to do it at such a rate to effectively just kill off the economy in order to sort of have a meaningful effect on the supply side of the equation. Yes the Fed is not facing a very good set of options here. So I think what they have been hoping is that you know they would put the pedal a little bit on you know the brake on a bit on the economy dampen demand by raising rates. And at the same time they would start to get some help on the supply side that the supply chain problems we've been talking about would start to fade that participation rate would start to rise and loosen up on the labor market. And together this would bring down inflation toward the Fed's target. But they are not getting that much help right now on the supply side. Clearly the war in Ukraine is having a negative effect on oil prices also on food prices. And as we were already talking about with your previous guest the Chinese policy zero Covid policy is not really going to help on supply chain. So I think we are going to be in a situation where the Fed is going to have to decide whether they're going to allow for a bit higher inflation to persist or whether they're really going to just squelch it in which case they would have to raise rates considerably and really put the brakes on the economy. And with that comes unemployment. Does that immediately quash any sort of wage spiral that we've been seeing. I mean we haven't seen a wage spiral but wage inflation hasn't kept up with overall price inflation. But do you think that that comes down. What does the unemployment picture end up looking like. Do you think Stephanie. I mean the economy is starting from a very strong position. The unemployment rate is quite low now and wage growth has been healthy even though it's not keeping up with inflation. I think that in a scenario where we don't get a lot of further negative supply shocks it is possible we could see sort of a very modest unemployment rate rise that would you know obviously be painful for people who are unable to find jobs but wouldn't have a significant negative effect on the overall economy. But if the Fed had to really raise rates in order to squelch inflation coming from these supply shocks then I think we would see you know much lower wage growth much higher unemployment rate. Stephanie Aronson really amazing to have some of your views of course your expertise having had a position at the Federal Reserve Board as well. Some really interesting insights. We thank you of the Brookings Institution. Now meanwhile coming up in our third take we're going to look at the future impact supply chain snacks on retailers. We'll dig into well the China question. This is bring back. All right. Welcome back to Triple Take on Bloomberg. Today we are focused on the challenges facing the retail industry and so far we discuss those retail earnings gap numbers. Well they weren't good. Plus we hit on inflation and how that maybe eats into folks spending. Now we're going to move on to our third take and focus on well the elephant in the room Caroline and that's the supply chain. And I know you caught up a little bit earlier with the CEO of Macy's. You're running around the building trying to catch this guy when you catch him on the phone earlier this morning. And Jeff Kennett was actually really illustrative about the concerns about supply chain. In fact they've done really well in the last quarter. They said the supply chain was far better than had anticipated things arriving and a much more seamless man than had been used to. However he did talk about storm clouds looming and the supply changes. Does it moment the ports look OK. But look over at the port of Shanghai. What's about to be released. He thinks that's going to be a bottleneck that's going to persist. He's therefore really looking to protect the receipts the sales that they're going to have for the back to school period. So we're looking as far as the September and then even the holiday period looking out into October November. So clearly they're already bracing themselves for what could be a worse picture. Once again once China exits this 0 Covid policy or at least the Covid starts to dial down and they're able to reopen their manufacturing. All right. Well let's talk a little bit more about this and bring in someone who knows a lot about it. Brett Rose founder and CEO of United National Consumers Suppliers. It's a wholesale distributor that sources products for thousands of retailers worldwide including Macy's which we were just talking about. And Brett let's talk about just I guess the supply chain and the inventory picture in and of itself. Because in the past before we got to the current issues we were in the inventory side of the equation was crucial for retailers if they wanted to make money and make money consistently here. That's all been disrupted because of the trade war because of the pandemic. Are we at a stage now where retailers are finding a way if at all to maybe rightsize that inventory model. Thanks for having back Ramon. You know you're spot on if you if you look at the supply chain sort of as literally a pipeline urban so many cogs along the way. It has been a disaster from port closures at the beginning of the pandemic to you know crazy high freight costs that are gone up that have driven the prices up. I actually view the inventory levels that are high as a sort of a win at least for four retailers. If you think about it most retailers forecast six to nine months out. So if as they hold the breaks because the cliff of of the purchasing sort of fell off that will start to alleviate some pressure come through for all the inventory they currently have sitting in their warehouses and in their distribution centers is going to translate to at least eight a regulation of pricing sort of no artificial inflation prices down. Where it will really start to have effect is come January February once they start to blow through that inventory in Q4. Right. As we talk about the implications of these Covid lockdowns at getting longer and longer in terms of the timeframe. Does that expedite the need to near shore for a lot of these companies move the supply chains to say Latin America. Yeah. You know Latin America here in the States you know different different ports. And in the Far East really if you look at retail as different segments specifically look at all price for a minute you know taking the Gap and Abercrombie and all those guys aside we sort of knew that was coming there to some degree a one trick pony. Look at the off price models. Look at TJX Home Goods Ross 5 below. They've really got it down pat because what they've done very successfully is diversify the supply chain. They're not so dependent upon China and the Far East and they're not so dependent on a six month pipeline. They can shift and move now and take advantage of stuff that's already on the ground. ISE stuff starts to arrive in Long Beach and all these other ports daily. You've got guys like Wal-Mart and Target canceling purchase orders left and right. To some degree it's Christmas to the retailers that are poised to take advantage of that excess inventory. From your perspective so it sounds like if you're if you're into fashion this is going to be hit tough right for you if you haven't got the right inventory at the right time. But as long the time goods and appliances and the like maybe you can catch them a little bit way out. But what are some of the models that you've seen of companies managing to protect themselves if they are a one trick pony if they haven't been able to source closer to home what are they doing in this environment. Tell you two people that I look at and we watch very closely from index standpoint Macy's being one of them. Right. They do an unbelievable job clean balance sheet. And where is their growth. Their growth is on the third floor and backstage. They've shifted their model. They have the name Macy's which is on trend on time fashionable and they've shifted to off price to sort of capitalize on their name and look at Dollar Tree. Many years you went the Dollar Tree you bought something for a dollar you spent the dollar. Now they've got one two five and 10 or twenty five and up and there they're tremendously successful at it. The street loves them. So they've taken their existing model and really shifted. They're capitalizing on the orders they have coming in from the Far East Macy's to and subsidizing it with excess inventory that's already here in the states and North America. What's the role right now in this particular environment for maybe some of those companies that aren't as big as Macy's don't have this scale but aren't necessarily kind of the kind of old school companies that have a lot of baggage like a Gap or Abercrombie and Fitch. Some of the more newer direct to consumer names today face the same issues at the top or at the bottom. Well you know you have to look at it very differently. Omni channel retailers are omni channel retailers brick and mortar retailers strictly. If you look at a lot of the off price guys they couldn't you know they didn't they had a hard time translating to online during a pandemic. They had to ship. But you can't replicate that sort of off price model. Right. Some of the guys like you have a Lululemon you know the peloton. They're having a very hard time. They're doing some nice sort of pop up store and store models with some of the bigger retailers similar to what targeted over the years with. And they did it at one point with Vineyard Vines but they sort of have to create that experience for the consumer because prices are high. So why is she coming in the store. Why's he going on the site. What are they buying. And they've got to create the experience and walk into a gap. And they have fallen short on on every level. And meanwhile Alton is on his call right now saying that an open 26 target shops in the first quarter. And we see how that continues to evolve Fred. Rose really interesting take. We thank you so much. Piracy of United National Consumer Suppliers. Good to be back in a minute. And our final take this Liberty Mac. Welcome back to Triple Take. Time now for our final take a look at retail or earnings and more importantly I guess the resiliency of the consumer. I guess it depends on whether shopping. Right and whether the shop is able to offer the right thing at the right moment. I mean inventory levels the pricing cuts the way that gap basically is not fit for the task right now. We had it from John Rogers. He's basically saying that this is about the way the business is managed right now. And you're lucky if you've got a more broad offering and it's not just the stateside story it's what does the rest of the world have to do from China to Germany. Can you get those exports out. And how does the fact the average American shopper. And I think some of these inventory numbers are worth keeping an eye on. I mean we heard from Brett Rose who said there are a good thing but they're a good thing until they're not right. And you sort of wonder which company is going to be able to shed that inventory when they need to and which ones are and which ones end up having rich pickings. TJX Ross stores because it ends up in the market. Right. Yeah. We're going to have to going and rifling through. I think it's time far party chic for that. Where's Bloomingdale's when you need it remain. Meanwhile triple take Bloomberg Technology is up next. This is Bring Back.

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Bloomberg Markets: Triple Take (05/26/2022)

Caroline Hyde, Romaine Bostick and Kriti Gupta discuss one topic from three different angles after the closing bell on Wall Street. Today's show tackles retail earnings Guests Today: Stephanie Aaronson of the Brookings Institution, Brett Rose of United National Consumer Suppliers (Source: Bloomberg)

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