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Stumbles for retail and tech are part of the same economic story

·Senior Markets Editor
·2-min read
In this article:
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The tail end of first quarter earnings season has brought two clear investor desires — more cash and less inventory — to the fore.

Tech companies are scrambling to gather the former while retailers are stuck with too much of the latter. And in their own way, each industry is telling the market that a paradigm shift brought on during the pandemic has turned into a passing phase of this economic cycle.

Dick's Sporting Goods (DKS) became the latest retailer to report bloated inventories on Wednesday morning, noting a 40.4% increase in its backroom stock during the first quarter as same-store sales fell some 8.4%. The company also cut its full-year outlook, saying it expects same-store sales will fall between 2-8% this year amid what it called "evolving macroeconomic conditions."

The inventory build is not unique to Dick's.

As we've heard over the last few weeks, 40%+ inventory builds have been seen at retail peers including Target (TGT), Abercrombie & Fitch (ANF), and Kohl's (KSS). Even Walmart's (WMT) ruthlessly efficient supply chains resulted in the retailer building inventories by some 24% during its most recent quarter.

Inventories across the retail industry surged in the most recent quarter as sales dropped amid inflation pressures. (Source: Yahoo Finance)
Inventories across the retail industry surged in the most recent quarter as sales dropped amid inflation pressures. (Source: Yahoo Finance)

For consumers, the potential upside is that sales could be forthcoming into the summer and back-to-school shopping season. And perhaps these price cuts to clear inventories could offer some benefit to the Federal Reserve's plans to bring down inflation.

Retail inventories swelling in the first few months of 2022, however, also tell us what this sector's story is likely to be over the balance of the year, during which we expect to hear plenty of talk about "right-sizing" or "optimizing" or "managing" inventory levels.

And in this clear path to alleviating the industry's pain point, we see echoes of how the tech industry has started communicating with investors over the last month. Companies ranging from Uber (UBER) to Meta Platforms (FB) to Robinhood (HOOD) all announced versions of plans to either rationalize costs, slowed or reduced headcount, and emphasized free cash flow.

And while the details of these two industry-wide initiatives may be different, the impulses have similar origins: As the economy moves past the pandemic-induced distortions of 2021, we see what appeared to be new industry paradigms fall out of favor while tried-and-true paths to creating value make a comeback.

At the same time, investor hopes that retail would realize structurally higher margins after the pandemic appear to have been dashed while the tech industry's "grow now, profit later" model has been reversed.

Another pandemic truth for investors that appears to have been just a moment in time.

Myles Udland is the senior markets editor at Yahoo Finance. Follow him at @MylesUdland

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