The pandemic has made this traditionally-used number much less meaningful.
June 7, 2021
– Advisor: Daniel Kline
Industries: Consumer Discretionary Consumer Electronics Consumer Staples Retail
Sales comparisons won’t mean much when operating conditions in one year versus another aren’t comparable. Since March 2020 retailers have been dealing with the pandemic in some fashion or other. That could have meant a total shutdown or, in some cases, it actually led to higher sales due to unexpected demand.
Now, as the world starts to return to some sort of normal, year-over-year and even quarter-over-quarter comparisons should be viewed with a more critical eye. That includes discounting some results that may look incredible and excusing some that appear particularly bad.
Lulelemon (NYSE: LULU) saw its first-quarter revenue jump by 88%. That’s impressive — especially since the company remained profitable during the year-ago period — but is it indicative that demand has increased dramatically? It’s possible that the company has increased its audience significantly, but it’s also possible that the recovery of brick-and-mortar stores and pent-up demand created an anomaly.
To know the truth, you can’t just look at this year and last year. You’ll have to let the story play out over the next few years and you may need to adjust how you view sales. Is Q1 2022 a failure if it’s up 2% over the quarter-ago period that showed 88% revenue growth?
It’s also going to be important that sales patterns may not be typical. Consumers may have chosen to celebrate the end of the pandemic by pulling forward a bunch of purchases. That could lead to a quarter or two of very strong results followed by one or two weaker ones. If that happens, investors should remember to zoom out and consider longer periods of time.
In addition to looking at raw sales numbers, it’s also going to be important to consider bottom-line profitability. Many retailers faced significant added costs due to pandemic-mitigation measures, bonus pay, and an increase in delivery and curbside pickup. Those costs may fall and that could lead to higher profitability on lower sales. If that happens, investors should consider whether the lower sales came from an actual loss of customers or something else like people buying fewer groceries because they’re eating out more.
When evaluating retailers over the next few years, it’s going to be important to take a deeper dive into the numbers. You should look at more than just the traditional metrics and instead dive into the why and the how. That’s not easy to do in the short term, but over a longer period, you should be able to figure out whether a company’s business has changed in any meaningful ways.
It’s important as an investor to recognize that most financial media just reports the same set of numbers quarter after quarter, year after year. Those rote stories have never been all that useful and over the next couple of years, they will matter even less.
Stock prices will likely be unpredictable in the short term, which makes a long-term view more important than ever. One quarter has never told the full story and the pandemic has made that something investors should keep front of mind.
[su_button url=”https://7investing.com/subscribe/?marketing_id=79194″ target=”blank” style=”flat” background=”#84c136″ color=”#000000″ size=”6″ center=”yes” radius=”0″ icon_color=”#000000″]Click here to see our stock market recommendations and subscribe to 7investing![/su_button]