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Traders on the floor of the New York Stock Exchange. Source: NYSE
Retail earnings have never been better, but the delta variant remains the wild card. In theory, this is a golden moment for retailers, which begin reporting earnings this week. Consider the following: The consumer is flush. The American consumer has never had more disposable cash or more leisure time than in the past year. There's commodity inflation, but most retailers can pass on the higher costs. Because the consumer is flush, there is less resistance to higher prices. There's a supply/demand imbalance. Demand for most goods is high, but supply is low because supply chains have been interrupted. Inventories are low. There's very little on sale. Retailers can sell more goods at full price. That helps profit margins.
The big wild card is the delta variant
The market is trading up on the narrative that the economy will keep opening up, but the delta variant means consumer behavior could change quickly. The key test is back to school. A strong back-to-school season is good for retailers, and usually implies good holiday sales. Look to the South, which has early school openings.
Market share and margins the key issues
Two key questions as retailers begin to report earnings: What is the trajectory from 2019 to 2022? 2020 is not a good comparison year; investors will want to know how 2022 is going to stack up against 2019. Can margins stay high? Higher revenue and lower costs have significantly improved margins, but inflation may be a bigger headwind than some expected. For Joe Feldman, who follows retail as senior managing director at Telsey Group, this is the biggest issue: "The consumer is ready to spend, but I am worried about the cost side of things," he said. "They are nervous due to freight expenses and labor costs. How much can they pass on?"
Will the winners keep being winners?