AAP Morning Feedback: Fed Minutes, Dick’s Sporting Items, Bloated Inventories

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Stocks continue to look for firmer fundamentals as investors sift through recent corporate earnings and a modicum of economic data as we await the release of minutes from Wednesday afternoon’s Fed monetary policy meeting.

At the close of that meeting, Fed Chair Jerome Powell outlined expectations for a further 50 basis point hikes at the central bank’s June and July meetings. However, this behind-the-scenes look might offer some clues as to how aggressive the Fed might be after meetings.

No doubt readers of the Fed Minutes, and we are among that group, will be looking for insights into what Fed officials might evaluate to measure the success of their inflation fight and how much pain to expect along the way. The Fed’s stated course, coupled with insights from these meeting minutes, will provide the backdrop for Friday’s release of the April PCE price index, a key indicator of inflation for the Fed.

While we await those meeting minutes and the April Long-lived Orders report, consumer confidence surveys in Germany and France came in weaker than expected. This weak data suggests that consumer sentiment is turning sour amid the protracted war between Russia and Ukraine, which has propelled food and energy prices in Europe. We’ll likely see this impact euro-zone retail sales when those numbers come out on Friday, March 3.

We were reminded of that again this morning with Dick’s Sporting Goods (DKS) quarterly results. Dick’s reported a 40% year-over-year increase in inventories at the end of the April quarter. As with a growing number of other retailers, Dick’s inventory hit record levels, adding to our growing concerns about retailers’ margin pressures in the coming quarters.

Adding to that concern, Dick’s cited the impact of the “evolving macroeconomic environment” as it lowered its full-year same-store sales guidance as well as its full-year EPS guidance. We interpret this to mean the growing headwinds for consumer spending that we have shared with members.

Taking into account the April quarter and updated economic forecast, Dick’s now sees same-store sales down between 2% and 8% year-on-year versus the previous forecast of flat to -4%. This suggests it will have a difficult time working off its quarter-end inventory, as does the reduction in the company’s EPS guidance to $9.15-$11.70 for the year from its previous guidance of $11, $70 to $13.10.

We see all of this as the latest warning in an increasingly challenging environment for retailers, especially those with a non-differentiated business model. It also underscores our downgrade in shares of Walmart (WMT) to three yesterday and our plan to take advantage of WMT’s short-term strength to exit that position.