The Great Retail Shrinkage Problem - Cause for Concern, or Just an Excuse? 8/22/23

0:01It does indeed. John, thank you very much. Right now on Fast major shrinkage in retail stocks. Shares of Dick's sporting goods suffering their worst day ever as they slash their outlook over a massive rise in store theft. is crime. The main reason retail names are getting punished here. We'll debate that one. Plus, sales slump. Housing sales fall again as supply drops to a near 25-year low and mortgage rates jump to a 23-year high. Does this combo hammer the bull run for the builders? And later, charting Nvidia's next move ahead of earning Schwab's brutal August losing streak. And I bet that Baba is ready to bounce back.

0:40Good evening, everybody. I'm Tyler Matheson in for Melissa Lee. And this is Fast Money, live from the NASDAQ Market site. On the desk tonight, Tim Seymour, Dan Nathan, Guy Adami, and our special guest trader tonight, Kristen Bitterly, head of North America Investments at Citi Global Wealth. We're going to call you Chris, right? Call me Chris. Call me Chris. Welcome, Chris. Good to have you with us. Good to see you. We start now with a retail bloodbath on Wall Street. There was read across the board in today's trading session, Dick's Sporting Goods, Macy's, Nordstrom. They're among the biggest losers there.

1:12You see the percentage declines. Dick's posting its biggest drop on record after reporting an earnings miss and cutting guidance for the year. One big contributor, they say, the sporting goods chain blames an increase in serious retail theft and crime. Now, Macy's, meanwhile, beat on the top and bottom lines. But disappointing third quarter guidance sent the department's or stock to its lowest close in more than two and a half years. And the weakness pushing the retail ETF, the XRT, down more than 2 % today. Worst day since May. It has now fallen, folks, in five of the last six sessions. Even Target, which saw a nice bump after its report last Tuesday, fell in sympathy.

1:54I don't know. Can a stock really have sympathy for anything? I don't really think so. We should have sympathy for people. We're not allowed to do that. Don't even say it. Because then we get charged. We get, like, in trouble. The big box retailer has erased now all of its post-earnings bounce. How about that? So is this all about the shrink, or is that just the shrink the new weather? You're setting me up there, aren't you? Is there a reason why you pointed the guy down here for that? You pointed me and said that's problematic. Because you have good insight into it. Well, no, I don't, Tim. But apparently there are pharmaceutical companies that have addressed that problem.

2:25I'm sure you're familiar with it. But that's for another show. Interesting. Is it a problem? Absolutely is it a problem. Is it the only problem? No, it's not the only problem. I mean, a lot of Target's problems have been self-inflicted wounds. The consumer is obviously a problem as well. They're moving down. If you listen to any, go back and listen to what Dollar Gen said about two and a half quarters ago or so, and they'll tell you people are going down the food chain in terms of where they're shopping. Who wins to that? One end of the spectrum wins. It's like a Walmart, a Dollar Gen to a certain extent, TJX, which we talk about all the time, and the flip side, which is the high end.

2:57In the middle, you get squeezed in this environment. Is this saying any of these retailers, is this saying anything, Chris, about the state of the consumer to you? I think that it is. So I think we saw this in Q1 earnings as well. So going back to Q1 earnings, it was all about the shift in from goods into services where we saw increase in spending. But now we're starting to see some cracks in the consumer picture. They're not overly alarming, but just how a lot of consumers are trading down, looking at rising credit card balances, looking at an increase, a slight increase in those 30 day delinquency rates from a credit card perspective.

3:30And so when you add all of that up, I think ultimately it does tell us a little bit about the spending patterns and how consumers are making decisions right now. Welcome, Chris. And, you know, we also heard from Jeff Jeanette at Macy's that delinquencies are something that they're listening to, too. So you have a case where you have a consumer that pulled forward so much in terms of sporting goods, electronics, clothing, apparel. Dan, I mean, I don't know how many Lululemon pants. I'm lighting them up. Yeah, you're lighting them up. But truly what we even heard with Apple, I would make an argument, is that the discretionary spend for the largest consumer and largest company in the world was real.

4:09The messaging from the companies is also one where they don't see the second half getting a whole lot better. This is all coming in a world where their labor and their costs around some of their business have remained very high and will remain high. And I think you've got a consumer that, as we know from from Walmart and Target, for sure. But the mix, as you pointed out, is very, very different. So why, if it's true, Dan, that consumers are feeling this a little bit, why are they feeling it? They've got jobs. Joblessness is very low. Incomes have gone up a bit, not not maybe as much as inflation.

4:42But why are they feeling it to the extent that they are feeling it? Is it because prices have gone up so much and they just can't keep up? Yeah, and I think there's a lot of folks who've kind of explained this, and I'm sure Chris could help us here, add a little IQ to this desk here. I mean, when you think about June of 2022, we had CPI was 9 percent, right? So that's a year-over-year number. And here we are. Yes, it sounds great that we're now like at 3 percent or something like that. So here we are, you know, two-thirds of the way through 2023. But that's still 3 percent higher than the year ago levels that were up high single digits.

5:13And so when you think about wage growth, you just said it, Tyler, it's just not keeping pace of that. And Guy's been saying this. We're talking before the show. He was saying in 2021, the persistent and pesky parts of inflation have become embedded for all intents and purposes. They were embedded, but not really covered the way we register CPI. So it's health care, it's education, it's housing, all those sorts of things. So, you know, we are in a situation where I think, you know, not that I don't like to give Jamie Dimon credit, but when he said a few months ago, be prepared for six, maybe seven percent sort of interest rates there.

5:47I mean, I don't think he said that particularly too lightly. And I was not in that camp and I'm not an economist and I'm certainly not a CEO of a major money center bank or anything like that. But I think we better be prepared to hear what the Fed has to say on Friday. And I don't expect it to be particularly dovish. How much, Chris, do you think rising interest rates are hurting consumers? In other words, you've got, I mean, people are postponing buying new homes, I think, in part because they don't want to trade their 2 % or 3 % interest rate for a 7 % interest rate. But there are a lot of loans that aren't mortgage loans that people have.

6:19They have lines of credit. They have home equity lines of credit. They may have auto loans. And those things have drifted up, which is probably why you're seeing more delinquencies. Exactly. So when you break apart the consumer and you say, what is happening within the housing market? We've heard a lot about that today in terms of existing home sales, people feeling trapped in their homes because they want to maintain that mortgage rate. But a lot of debt is floating rate. A lot of debt for consumers. So the trend that we're seeing right now is one where you had stimulus fueled spending. And right now that's actually converting into credit driven spending.

6:53That in and of itself isn't bad, but obviously the debt servicing of that as rates go higher and higher creates a much heavier burden on the average consumer. So it will affect those decisions that you're making. And listen, you know, we talk about the health of the consumer. I'll give you the other side of the coin because I don't think they're particularly healthy. Serious delinquency rose from 3.35 in terms of credit cards second quarter last year. It's now over 5 percent, which doesn't sound like a big deal. That's a big deal. Those don't move percentage points like that over the course of the year.

7:22And that's not going to get any better anytime soon. As I've said, the consumer is fighting inflation with debt. That does not end well. Are there retail stocks that you like? We talked about TJ Maxx. I mean, we go is an all-time high. That just stock grinds higher for a myriad of different reasons. You can make an argument against that valuation. My wife's expenditures there among them. Joe is watching right now, Tower. She is watching. So you might want to say hi. Joe, by the way, good to see you. But TJX works. And I think, listen, Walmart quarter was very good. The stock reaction wasn't great.

7:52The quarter was very good, though. The flip side of this is someone like a Lulu who reports about, I think, a week next Wednesday or Thursday and is trading at a multiple that relative to itself over the last three years has come down. But on a trailing basis, and I think trailing is relative in this backdrop when we're talking about the pull forward on discretionary, it's 51 times. I'm short, Nike. I think you can be short, Lulu. It's certainly something I'm looking at. These are places where you have bulletproof, best of breed brands and balance sheets and leading edge of fashion and apparel.

8:25There's just only so much you can buy. And at these multiples with this is what we talk about the stock market every night at 350 basis points higher on your discount rate from where you were when Lulu got this premium valuation. You know, I think that's one that's also if you just look at the chart on Lulu, it's moved sideways for the last three to six months between this 270, 290 range. I think you have an opportunity there on the short side. All right. Let's get more on the extent of these theft losses with CNBC senior retail reporter Courtney Reagan and CNBC digital retail reporter Gabrielle Fon Rouge.

8:57How about it, Court? Are the companies that are citing theft using the theft to cover other problems in their business, or do they really have a theft problem or both? I think it's potentially a little bit of both. I think that it is undeniable that theft and organized retail crime has increased this year over last year. When you're talking about industry wide with certain retailers and in certain areas of the country, we see it from the National Retail Federation. We see it from all these different CEOs. Actually spoke to three different CEOs, executive chairman today. And Macy's CEO said, look, it's elevated.

9:31It's factored into our guidance. This year will be higher than last year. Dick's Sporting Goods Executive Chairman Ed Stack, son of the founder, said it's going up. It might get worse this year. We have that factored in. That took the stock down about 24 percent. And then Lowe's CEO Marvin Ellison very interestingly said, actually, shrink for us is flat year over year. But I would point out that Lowe's and Home Depot are among the retailers that have actually been pointed to shrink as a material weakness for years now. And so the fact that it might be flat at Lowe's is good, but they've had a while to sort of figure this out, more so perhaps than the others that have not seen this as a more recent phenomenon.

10:04We had a guest on earlier today who talked about Lowe's and the question of shrink and said that one of the ways they have fought back is by embedding into some of the power tools that were high targets of theft, embedding RFID kind of chips that block these devices from being used. Unless you've actually gone through the point of sale. Exactly. So that's part of it. There's other point of sale technologies that they used, other security measures. They don't want to tell us all the details, understandably. Marvin Ellison told me today, look, I'm not going to tell you exactly what we've done because clearly what we've done has worked and it's weeded out some of the bad actors.

10:37But that is an example of one thing that some of the home retailers. Gabrielle, weigh in here. Talk about the theft problem from where you see it. Yeah, I mean, you know, everyone is talking about it. It looks like it's going up. Retailers have been consistently talking about it over the last couple of years. There is survey data that does show that retail crime is on the rise. But this survey data is not definitive. It's based on you're asking retailers, have you noticed an uptick in theft or what are your shrink numbers? It's all anonymized. It's all taken on the honor system. You know, federal theft levels have been plummeting for the last 20 years when you look at FBI crime data, but it all goes unreported.

11:16So it's really difficult to suss out whether or not this is actually on the rise. I think it's a little bit of both. You're using it as an excuse in some situations. Other situations, you are seeing an uptick. But something that we need to think about here is that shrink doesn't always mean retail crime. The two words are not interchangeable. So when retailers are talking about an uptick and shrink that doesn't necessarily mean that they're only seeing that it could be seeing an uptick damage and loss um employee theft a vendor fraud um and a lot of these guys have had bloated inventories and when you have a lot more inventory there's a lot more stuff that could be lost you you say pointedly uh gabrielle that that in dick's case most of the losses came from markdowns to move inventory not from shrink you say target was not talking about crime until they had massive inventory issues.

12:04So that's pretty pointed accusation there. I mean, but the numbers speak for themselves and the comments speak for themselves. If you look in Dick's earnings report today, their CEO had a quote that said that their Q2 earnings were severely under pressure, largely because of shrink and retail crime. I believe they just called it shrink. But then when you go on the earnings call and when the analysts are pulling back the layers, their CFO acknowledges that actually the vast majority of the losses was all the work that they did to clear out all of that outdoor category that they had been sitting on all this excess inventory.

12:35So it's interesting when you see the way that they describe it in a press release and that front quote from a CEO saying, hey, this is shrink. This is out of our control. This is a retail wide issue. But then when you start pulling back the layers, you realize that they lost a lot more from markdowns than they actually did from shrink. That's not to say that shrink wasn't an issue for them and that retail crime is not an issue for them. But it's not the main thing that drove their losses this quarter. Court? Yeah, I mean, again, to Gabrielle's point, there are also all these surveys out there.

13:03And I get a lot of feedback whenever I do these stories. And everyone says, why do you call it shrink? Why do you just call it theft? Because it's not all shrink is theft. Some of it is employee theft, and that's not necessarily organized retail crime. It's damaged. Some of it literally is stuff that fell off the back of the truck. Yeah, some of it is somehow it's damaged. There's process control issues. There's sort of unknown reasons for why things have to get written off. So it is all part of it. And I do think that Gabrielle brings up really good points. And Target, I keep saying, is one of the retailers that has pointed out a very definitive number in their forecasting of shrink and the damage there.

13:37And in 12 years of covering retail, I have never seen any other retailer give you a number like that. And I find it very interesting in this last quarter that their earnings forecast was so far off, but yet they said, oh, actually, our shrink forecast from last quarter, that held up for this quarter. We pretty much nailed that on the head. And I thought, how in the world can you forecast theft better than you forecast your own earnings results in your sales forecast? And, Court, getting to, you know, Dix, at the end of the day, though, they said same store sales will be up 2 % second half as expected.

14:05But they pushed down their EPS guide by almost 10%. So the margins are coming down. It's not just shrink. I mean, what else is it? Yeah. I mean, Ed Stack said, look, a third of the gross pressure margin is from shrink. So he called. So then that means two thirds is not, Right. It's other things. It's these markdowns. They had really, really strong outdoor business during the pandemic and then truly thereafter, sort of after we came out of the depths. And then they ended up with a lot of bloated merchandise. How many kayaks does somebody need? Right. So they did end up having to. Well, OK, you did.

14:35They did end up having to discount a lot of that. They also said that sales were weaker in May and June and they saw a really nice uptick in July. And so I did think that it was interesting that they didn't then further their forecast. If things are sort of trending higher and back to school is looking great, well, then why didn't you move further? And the answer was just, oh, we're trying to be conservative about, you know, what the consumer is seeing. But our consumer is strong. So a lot of mixed messages. And you guys were talking about the consumer before. And if I can just bring in one thing.

15:00Marvin Ellison, who I was speaking to earlier today, the CEO of Lowe's, said actually for us, I don't think that it's about the consumer's personal balance sheet. I think that is actually pretty strong. You were all bringing up points about what's going on with jobs and savings rates and all that, albeit potentially declining a little. He said, I think it's more about the fear of the unknown and the fear of what's to come. And I think we've all been dealing with inflation for a really, really long time. And after you pay prices that are elevated for a while, you're kind of just tired of it, right?

15:27You start to sort of wonder how much of that is worth it to continue to do. And while some prices that get inflated come back down, some food prices do, I don't think you're going to see restaurants cutting prices. I don't think you're going to see a lot of places reducing prices anytime soon. Car prices are quite elevated. Car prices, pretty stuck there. Gabrielle, final thought here. We've got other retailers that are going to report this week, if they haven't already. Gap among them, Abercrombie among them, Kohl's, I think, as well. What do you expect to hear from them and how big a factor or little a factor will shrink be?

16:04Yeah, so Kohl's has been calling out shrink for a couple of quarters now, at least until last year. So it has been an ongoing issue for them. They're also more prone to shrink because of how they're situated. They're off mall. The mall retailers really don't talk about it that much. It's harder to steal from a mall. I mean, we've all been at a mall. Once you're in a gap or in one of these retailers, you have to exit the store, then exit the mall. It's way more difficult. So I think that's why we actually hear that less. Gap does see shrink. They invest heavily into organized retail crime alliances.

16:36It's something that they care a lot about. They don't talk a lot about it, but it's there and it's something that they're involved with. So I do believe we'll hear it from Kohl's. Nordstrom isn't somebody that calls it out, but that doesn't mean that they're not seeing it. retailers are often loath to talk about shrink, especially when you're thinking about a more premium luxury retailer like Nordstrom's. They don't want, you know, customers coming in and thinking they're going to be a victim of a crime or they have to witness crime. And look at this video that we're seeing right now. That's exactly what, you know, why.

17:03And that was a Nordstrom, correct? Yeah, the smash and grabs have happened in several Nordstrom's. This was a Nordstrom back a week or two ago. I mean, it's just really crazy. And that's, that looks like an organized theft ring doing that, right? That's not just random. And these thieves are going in there, and they're stealing items that then often get resold on online marketplaces. It's not shoplifting for personal use in most cases. All right, Gabrielle, Courtney, thanks very much. We appreciate it. We're going to trade this a little bit. Dan, just a little bit. All right, this sounds so 10 years ago, but remember when Amazon reported last week?

17:36Remember those operating marches they had on the retail business? It really is kind of interesting. Remember, we would talk day in and day out about how Amazon's going to eat the lunch of the mall retailers and this stuff. It seems like that's what's happening right now. I mean, maybe like the build that Amazon got punished for during the pandemic, the building out court of all logistics and everything like that is one of the reasons this company had those margins contract pretty dramatically. But maybe they're now getting to a point where this is like the place you want to be again. So completely agree with that.

18:05I completely agree with you because I think like Like one of the things is the health of the consumer, but it's also e-commerce and what happened during the pandemic. And some of those trends are absolutely here to stay. So the build out of that last mile logistics, the fact that this is how a lot of people buy pretty much the majority of their goods right now. And so I think if you are brick and mortar retail, it needs to be very niche, very specific for you to be for you to be successful. Or you need to have that e-commerce strategy as well. I just think that disinflation has been such a theme also over the last couple of months.

18:37I mean, I know it's a very active theme in the hedge fund community in terms of who they're going after. And it's certainly played out in a target in some of the more obvious places that have exposure to food and grocery. But I just think you have a perfect storm. First of all, these are brutal comps for a lot of these, especially apparel and discretionary folks. In other words, it was about as good as it could get in terms of demand coming out and pent up. I think margins are under pressure from labor. And I think you I actually look numbers I'm seeing on household savings rates tell me that we've actually burned through it.

19:06And I'm seeing a couple of economists say that we're actually pre covid levels in terms of household savings. It goes pretty quickly, especially when people are starting to see interest rates take a big part of their monthly nut. All right. Thanks, folks. Appreciate it. My wife says hi, Guy, by the way. Yeah, of course she does. She watches. She watches. Why just Guy? Because I said hi to her. You said hi. She would say hi to you. But he said hi. So anyhow, Joe says hi to everybody. All right, coming up, the earnings keep rolling in. Toll Brothers on the move after reporting his home sales data also filter in.

19:36The whole housing trade is next, plus a streak you won't want to brag about. Shares have swabbed down 11 days in a row. The last time I saw that type of action, the show Friends was still on TV. We were watching it, but we were just watching it still on TV. Come on, guys. And not the reruns, however, we're talking about. The real show, the live one. I wasn't live either, but we'll lay out why the stock market has why that stock in Schwab has not been so friendly when Fast Money returns. We'll be right back.

20:12Welcome back to Fast Money, everybody. Earnings alert on Toll Brothers shares of the home builder gaining ground after exceeding top and bottom line estimates, It's a surge in signed contracts, prompting the company to raise its full year guidance. Diana Olick here to break down the numbers. Hi, Dai. Hey, Ty. Yeah, toll really blew the doors off. New signed contracts up 77 percent year over year. This even is the average rate on the 30-year fixed mortgage went from 6.5 to over 7 percent during the quarter. The realtors reported this morning that while home sales were down across all price points in July, They were down the least in the million-dollar-plus range and luxury tolls average price$1.06 million.

20:51And they raised price guidance for the next quarter. CEO Doug Yearly said while rising rates remain a challenge, they further cement the lock-in effect that has kept resale inventory at historically low levels. with our deep and well-located land holdings, healthy backlog, more efficient operations, and balanced spec strategy. We are well positioned to capitalize on continued solid demands for new home. Toll also raised guidance for its deliveries. Tyler. All right, Diana, thanks very much. Chris, what do you think on the housing market and on Toll, if you have an opinion there? Yeah, so I think looking at the data that we got today with existing home sales, this is new home sales are the only game in town.

21:31There is no inventory. We talked about this earlier, that people feel trapped in their homes because of the historically low mortgages that they locked in. And so if you have that ability, when you look at new home sales, that really is the only opportunity both for buyers as well as sellers. So if you have inventory that you can put to market, that would lead to some strong results. What do you think of the builders? It's hard to argue with the builders, especially when they're giving you this kind of a guide. The argument against the builders, though, is that the builders are at year and a half highs and that we've had an enormous rally that a story that I think we know.