Retail Fail

Kroger’s quarter bombed on lower sales, lower guidance, and lower profits. A triple lindy trifecta of pure winning.

I traded the dead cat bounce on it for a quick gain. Shares were down about 12.8% when I bought & around 10% when I sold.

“Its shares slid 11.6 percent in morning trade after it also reported a 10 percent fall in fourth-quarter revenue and lower-than-expected earnings for the first time since October 2017. Profits are expected to come under pressure as the retailer plans annual spending of up to $3.2 billion — up from $3 billion last year — to overhaul stores and improve its online business under a program called “Restock Kroger” launched over a year ago.”

Reuters

The big tech monopolies can basically spend infinite CAPEX and have it get brushed off as justifiably investing in faster growth, while any of the old line slower-growth & lower-margin businesses going through transformation get slaughtered for making similar adjustments to modernize their business to take advantage of the web.

Conceptually, Amazon can consider anything a beta (nixing their pop up shops) & get rewarded for any sort of news / change / noise / speculation, which tells the old line businesses to invest to narrow the competitive gap or at least the narrative gap & then they get killed for it.

Kroger’s digital sales rose 58% during its latest quarter, and the company said it is offering delivery or online pickup at 91% of its stores. … Kroger has pledged to generate $400 million in operating profit by next year, in part by diversifying its sources of revenue. The grocer is pushing into financial services, selling its consumer data to suppliers and selling more ads to target shoppers.

That really shows the power of leading a trend versus following it or trying to play catch up.

Not only do the tech monopolies get the benefit of the doubt, but there are dozens of food delivery startups which lose money on every order, yet they are raising billions.

“Billions of dollars have been spent in a quest to build services that reliably move fresh food from one place to another, yet many in the business wonder if they will ever get the economics right. Most delivery orders remain unprofitable. … Only 1% of 2,874 consumers surveyed by the research firm were willing to pay the full cost of grocery delivery. And 85% of consumers aren’t willing to pay more than $5 for restaurant delivery, according to a recent survey of 2,000 fast-food and fast-casual customers conducted by online ordering platform Tillster. … Venture-capital firms put $5 billion into U.S. food and grocery delivery services last year, more than four times the amount they invested in 2017 … Food sellers pay the services an average fee of 10% to 25% on each order, which means the actual deliveries often lose money. Better placement on the services’ websites or apps costs even more.”

Retailers with a 1% to 3% profit margin aren’t going to win by paying third parties 10% to 25% of each sale.

And as long as humans are needed for deliveries margins will be terrible at third party delivery services. And when automated delivery becomes highly commoditized & widely available, most of the value will bypass any third party delivery services and accrue directly to the retail outlets.

I might consider buying KR again in the future, but the whole market feels like it is sliding down & when the market is sucking an egg you basically have to trade almost perfect on long-only trades to stay flat. Unless you short stocks, you are almost better off ignoring the market until there is an uptrend.

The S&P 500 sliding below the 200-day moving average is not a great thing. Even if that is a nonsense technical signal of limited relevance, the fact that many people follow it makes it real. Many will be selling to de-risk portfolios and keep some dry powder.

CVS is down once again, along with Walgreens Boots Alliance (WBA). At this point both are deep value plays which are priced as though their business models are doomed. If multiple company insiders spent 6 figures on CVS shares at about $58 a share about a week ago, then the current $52 share price doesn’t look particularly expensive.

Big tech companies like Google, Amazon, Spotify & Pandora are challenging increased royalty rates for song writers.

The three-judge board, appointed by the Librarian of Congress to determine copyright payments, voted 2-1 last year in favor of raising the percentage of mechanical royalties owed to a song’s writers from 10.5 percent of revenue to 15.1 percent of revenue by 2022. The decision followed a two-year trial regarding how songwriter royalty splits might adapt to the streaming era. The leading songwriter association is calling the appeal by tech companies “shameful” and has announced plans to file its own appeal.

Central banks are pouring fuel on the fire as normalization seems to be … err … not working so well.

The Bank of Japan appears a decade or two ahead of other central banks in their seemingly never-ending interventions. They’ve killed their bond market (as they are the market) & the central bank owns a huge portion of their domestic ETF markets while bond yields are effectively zilch out to about a decade.

China is a firehose of money, seemingly announcing a new stimulus measure almost every week. Lowered reserve requirement ratios, QE-styled stimulus, tax cuts, etc.

The ECB announced new stimulus measures.

The European Central Bank made a major policy reversal Thursday, unveiling plans for fresh measures to stimulate the eurozone’s faltering economy less than three months after phasing out a €2.6 trillion ($2.9 trillion) bond-buying program, making it the first rich-country central bank to ease policy in response to the global slowdown.
The ECB said it would hold interest rates at their current levels at least through the end of this year—months longer than previously signaled—and announced plans for a fresh batch of cheap long-term loans for banks.

And not only is Trump once again complaining about the Dollar being too strong along with record trade deficits, but the Federal Reserve stated they paused rate hikes due to corporate debt saturation inside the United States.

A $5.7 trillion borrowing binge by U.S. companies could make a slowdown in the world’s biggest economy even more painful and is one more reason the Federal Reserve was wise to put interest rate hikes on hold, Robert Kaplan, president of the Dallas Fed, said.

60 Minutes will soon have a segment with Federal Reserve head Jay Powell this Sunday. It’s probably nothing.


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