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How retailers are juggling inflation, supply chain disruptions
Retailers are balancing supply chain disruptions, rising costs and consumer pricing strategies as they plan for the long-term and boost efficiency to navigate the current economic environment.
With retailers reporting first quarter earnings, supply chain and inflation are two big themes. Here's a look at retailer comments about managing through supply chain issues and inflation as well as consumers' shifting behavior.
Walmart
Walmart CEO Douglas McMillon said on the company's first quarter earnings conference call that wages, logistics and supply chain costs hampered results.
"While we've experienced high levels of inflation in our international markets over the years, U.S. inflation being this high and moving so quickly, both in food and general merchandise, is unusual. We'll control what we can control, reduce our inventory level and keep prices as low as we can, especially on opening price point food items while improving our profit performance. Inflation is playing a role in the top and bottom line and the pace of change created a timing issue for us in Q1. We're adjusting to the mix change and operational costs."
Walmart's inventory levels were up 33% from a year ago in the first quarter and reflect inflation as well as stock to ensure product availability.
Target
Target CEO Brian Cornell said the retailer saw gross margins come in below expectations due to inflation as well as consumer behavior that shifted. Cornell said that transportation and freight costs as well as fuel prices surged the last 60 days of the quarter.
"We saw much higher-than-expected rate and transportation costs and a more dramatic change in our sales mix than we anticipated," said Cornell. "This resulted in excess inventory, much of it in bulky categories, which put additional strain on an already stretched supply chain."
Specifically, Target had excess inventory in kitchen appliances, TVs and outdoor furniture. Target is also trying to keep prices down to maintain long-term relationships with customers, said Cornell.
"As you've clearly seen in recent quarters, overall costs have been rising much faster than retail prices, resulting in year-over-year declines in our gross margin rates. While we're not happy about the near-term pressure this causes on the profit line, we strongly believe these decisions will benefit our business over time."
John Mulligan, Chief Operating Officer, outlined further supply chain issues. Mulligan said:
"A separate challenge our team has been facing, which became more acute in the back half of 2021, is driven by capacity constraints in both the global and domestic freight markets. These issues continue to make it more difficult and more expensive to move inventory where we need it to be. Our team has done a great job managing through these challenges."
Mulligan added that it is rolling out Target last-mile delivery with its Shipt unit as well as opening sortation centers for packages. Target's plan is to continually improve and invest in its supply chain operations.
More on supply chain: Scenes from the supply chain: Cisco Systems | McKinsey: These 8 characteristics of resilient supply chains can give your business a competitive advantage | Execution management, process excellence key to outrunning inflation, supply chain woes says Celonis co-CEO
Best Buy
Speaking on Best Buy's first quarter earnings conference call, CEO Corie Barry said "macro conditions worsened since we provided our guidance in early March, including higher inflation and the war in Ukraine, which resulted in our sales being slightly lower than our expectations and supply chain costs a little higher than we planned."
Barry added that:
"We have seen cost inflation in areas such as labor, marketing and supply chain. However, this cost inflation was largely in line with our expectations and benefited from planning and execution over the previous 2 years."
Best Buy is passing through higher costs to consumers on a selective basis while being promotional in other areas. There are pockets of inventory constraints and "the supply chain continues to be challenging with ongoing transportation disruptions and higher costs including containers, labor and fuel," said Barry.
In addition, Best Buy is taking a portfolio approach with carriers, transportation partners and parcel delivery and mitigating costs through using both rail and over-the-road transportation modes.
Dick's Sporting Goods
Dick's Sporting Goods CEO Lauren Hobart said during the company's first quarter earnings call that it is actively managing through "the rapidly evolving macroeconomic environment" and thought it was prudent to lower its outlook for the year.
Hobart emphasized that it has retooled its omnichannel approach, added an analytics infrastructure and invested in the data science behind pricing strategies and assortment.
Nevertheless, Dick's Sporting Goods is trying to balance supply chain costs as well as a consumer hit due to inflation. Hobart said two things changed in its first quarter.
"First is that the consumer is going through an awful lot right now. So obviously, macroeconomic trends are challenging, inflation is putting pressure on the consumer at the gas pump and in grocery store, we all know. And then there's this geopolitical environment that is very, very challenging. At the same time, we see that the expenses of those 3 line items, so freight, labor and perhaps product input costs, are accelerating more quickly than we had anticipated. And so, we want to be appropriately cautious as we look forward to the year."
Nordstrom
The retailer reported a strong first quarter and said it was confident that its supply chain transformation would improve the customer experience as well as inventory and logistics metrics.
Nordstrom President, Director & Chief Brand Officer Peter Nordstrom outlined the retailer's supply chain initiatives on the company's conference call:
"Beyond merchandising capabilities, we're also working on our supply chain and inventory flow. We recognize the critical strategic and operational importance of supply chain, especially amid the broader supply chain challenges facing our industry. As a result, we identified opportunities across our network to improve efficiencies and capabilities, which ultimately improves our service to customers.
We have 4 initiatives in flight. First, improving the consistency and predictability of unit flow through our network. Second, increasing productivity in our distribution and fulfillment centers. Third, accelerating delivery speed. And finally, expanding the market level selection for in-store shopping as well as same-day and next-day pickup.
We believe these actions will improve the customer experience, increase sell-through, reduce markdowns and drive expense savings. While we still have work to do, we are encouraged by early results, and we expect to see more significant benefits in the second half of this year."
The Home Depot
Edward Decker, The Home Depot CEO, said that his company has navigated inflation and supply chain wild cards well. Homeowners are continuing to spend on improvement projects. Logistics costs are rising though. Decker said:
"We have taken costs this year, and there is more on the table. Transportation, we've just finished up our ocean contracts. That's a global contract cycle that goes into effect in May. So those are in place for the next 12 months. Those are certainly higher on a contract basis from 2021. So, we think inflation doesn't go up necessarily from where we are but that it would hold steady at this, call it, double-digit, low 10-ish percent in our product categories through the balance of the year."
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