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Company earningsNewsSupply ChainsTop StoriesTruckingTruckloadTruckload Carriers

‘Improved’ inventories still lagging sales growth; tailwind for trucking

Container imports to hit record highs from January to June

The nation’s largest retailers are painting a more constructive picture on inventories. On a sequential comparison, merchandise levels have continued to recover from the widespread stockouts seen in the early days of the pandemic. But record demand throughout the summer, fall and holiday buying season have inventories still in need of significant replenishment, which is a favorable catalyst for trucking demand.

A look at the retail sector’s recent earnings reports showed that sales outpaced inventory additions again in the fiscal quarter ending in January. While many retailers saw the gap between sales growth and inventory build narrow from the three-month period ending in October, the spreads were still negative, indicating inventory needs remain elevated.

Further, the first few weeks of the new fiscal year were unkind as port congestion intensified and winter weather turned hazardous.

Table: Company reports

Inventory still lopsided, prompting further supply chain investment

Retail giant Walmart (NYSE: WMT) again saw sales grow at a faster pace than inventory and by a wider margin in the fiscal fourth quarter. U.S. comp sales rose 8.6% but comparable inventories only increased 1.1%, a spread of 750 basis points. The spread was only 280 bps last quarter.

At its meeting with analysts, the company noted improvements to overall inventory but said that some parts of the store are struggling to stay in stock.

Acknowledging the merchandise constraints during 2020, Walmart increased its annual capital expenditure plan to $14 billion for the new year. The nearly $4 billion year-over-year increase will fund capex projects that are focused on supply chain initiatives in the U.S., including a demand-predicting supply chain engine. The ramp in investment is expected to total 2.5% to 3% of revenue over the next few years as the company addresses the need for incremental fulfillment capacity and other technology and automation initiatives.

Target (NYSE: TGT) is planning to spend $4 billion annually over the next few years, in part to support supply chain projects. The projects include the expansion of its predictive inventory positioning capabilities as well as replenishment capacity. The recent increase in sales has also necessitated the addition of two new distribution centers this year with two more planned in 2022.

The Home Depot (NYSE: HD) saw its inventory-to-sales spread improve from the fiscal third quarter, albeit remaining at a deficit, as inventory turns improved almost one full turn to 5.8x. Management said the company is in a “great” inventory position heading into the spring, even as sales have outpaced inventory by a wide margin over the last couple of quarters.

Lowe’s (NYSE: LOW) saw similar improvement in its spread but still at a pace that lagged sales.

Both home improvement companies have spent heavily on their supply chains in recent years. The Home Depot put more than $1 billion into 150 delivery and fulfillment centers throughout the country that are still coming online. Lowe’s has a five-year, $1.7 billion supply chain plan in place. The company is moving fulfillment for e-commerce items, like appliances, as well as contractor jobsite orders out of its stores and into bulk distribution centers.

Best Buy’s (NYSE: BBY) inventory position improved notably, but management said the company is still chasing stock in some areas. The company used 35% of its stores during the fourth quarter for its ship-from-store hub pilot. Some of those stores could see retail square footage transitioned into warehousing and packaging shipment stations as the company scrutinizes its retail footprint. 

The company has been rationalizing retail locations for the better part of a decade, closing roughly 20 of its larger locations in each of the last two years. The company’s large-format store closures will exceed that mark this year.

Even stores with sagging sales like TJX Companies (NYSE: TJX) – T.J. Maxx, Marshalls and HomeGoods – saw inventories decline at a faster pace than sales. The company noted “a terrific selection of inventory” and that it is “well positioned” for the spring. However, its current inventory level has been aided by soft demand for apparel throughout the pandemic. The company has added thousands of new suppliers and vendors to keep items on the shelves and is still lacking stock for many home goods.

Kohl’s (NYSE: KSS) reported a decline in sales, with inventory falling faster. Its inventory position was helped slightly as turns improved to a 10-year high. However, the company’s full-year 2021 sales guidance for a mid-teen percentage increase is at odds with another quarter of falling inventory levels. While the company isn’t expected to add stock ahead of sales, its declining position and robust outlook suggests it will be adding a significant amount of merchandise in 2021.

Retail sales continue blistering pace

January Census Bureau data showed seasonally adjusted retail sales climbed 5.3% from December, up 7.4% year-over-year. While sequential declines were seen during the fourth quarter, the streak of year-over-year increases, which began in June, continued.

The National Retail Federation pointed to stimulus checks as a boost to January numbers in its monthly retail report. The group said the recent trends were an extension of the record holiday buying that was reported last year. The November-December period saw “core retail sales,” which exclude auto dealers, gas stations and restaurants, climb 8% year-over-year to $787 billion. The full-year increase was 6.7% for 2020.

“Consumers and the economy as a whole remain in good shape despite unprecedented adversity over the past year, and congressional action has been a lifeline for households and businesses disproportionately impacted by the pandemic,” stated Matthew Shay, NRF president and CEO, in the release.

Online and non-store sales, or e-commerce, increased 11% on a seasonally adjusted basis from December, up 22.1% unadjusted year-over-year.

“There was none of the falloff in spending that we often find post-holiday and the increase was even better than expected. There is plenty of purchasing power available for most consumers, and the pickup in shopping has even been reflected in the number of hours worked by retail employees,” said Jack Kleinhenz, the NRF’s chief economist. He believes that “confidence is building” as COVID vaccine distribution is expanding.

The group is forecasting import activity to hit new monthly records from January to June at the nation’s largest retail container ports. Its preliminary take on January is that inbound twenty-foot equivalent units increased 14.6% year-over-year, making it the busiest January in the dataset’s almost 20-year history.

The year-over-year comparisons will not only benefit from a high-demand environment as retailers are still scrambling to replenish inventories but the comps are also easier due to widespread COVID-related shutdowns last spring, which knocked manufacturing offline for a while.

The NRF is forecasting first-half 2021 imports to increase 22.1% year-over-year. The group also expects retail sales to increase between 6.5% and 8.2% year-over-year for all of 2021, with online sales moving 18% to 23% higher. The forecast includes the assumption that consumers will transition to spending on services at some point during the year.

Demand high, capacity tight, rates up

Outbound tender volumes have remained at elevated levels in 2021, stepping even higher in recent days. While the year-over-year comparison increases briefly in March, due to pantry stocking in the early days of the virus outbreak last year, current volumes are already meaningfully above that level. There doesn’t appear to be a tough demand comp on the horizon until late August.

Chart: (SONAR: OTVI.USA)

The inventories-to-sales ratio for retailers was still near all-time lows at 1.28x in December, according to Census Bureau data. The latest reading was up from a June low of 1.22x, but well below pre-pandemic levels of approximately 1.45x.

The inventory catchup, which some estimate could last multiple quarters, may not be similar to previous stock rebuilds. The reason is the recent surge in digital sales and a fulfillment process that occurs outside of the traditional brick-and-mortar network.

E-commerce fulfillment requires more inventory as products are positioned in more warehouses that are closer to the consumer. Additionally, most sophisticated e-commerce networks are seeking to further reduce delivery times, which means getting closer to the buyer. That means higher inventories than in the past.

A rough stretch of winter weather and extended delays unloading ships on the West Coast, which has had a ripple effect on rail intermodal networks and container availability, has only extended demand for trucking.

Truck capacity is near the super-tight levels witnessed during the peak of the current freight boom as carriers are still rejecting loads more than 25% of the time. The year-over-year gap in spot rates is widening as well, just as shippers and carriers enter the heart of contractual bid season.

Chart: (SONAR: OTRI.USA)
Chart: (SONAR: TSTOPVRPM.USA)

Recent data from Cass Information Systems (NASDAQ: CASS) showed freight expenditures spiked nearly 20% year-over-year during January, in large part as volumes climbed almost 9%. Implied freight rates, or expenditures divided by shipments, were up 10% year-over-year, indicating freight spend is increasing at a much faster pace than shipment growth. The monthly report concluded that rate relief in the current cycle was unlikely to amount to what was seen coming out of the 2018 boom.

Visibility into a broader reopening is improving in lockstep with the vaccine distribution, suggesting consumer spending will begin to transition toward services at some point this year. The year-over-year comps also become more formidable in late summer and peak season. However, that is the time consumers traditionally shift their spending away from vacations and events to back-to-school items and hard goods. Further, with inventories still underperforming sales, and the need for more merchandise as buying has moved online, this freight cycle appears poised to continue to run throughout 2021.

Click for more FreightWaves articles by Todd Maiden.

Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.