As 84% of companies have so far reported their Q4 results, we’re able to see some of the common themes and get a better understanding of the reactions that have come from both the public and investors. The most common theme for the market so far has thankfully been forward-looking as everyone appears to be concerned about how companies are currently navigating their supply chain bottlenecks in order to hit their 2022 goals. Although 77% of all reporting companies have beaten their forecasts, the street seems to be more cautious for Q2 based on current projections. The cautious outlook is primarily rooted in the supply chain fragility, and today I explain how businesses can plan to overcome this.
3 Stories
Crocs flags impending supply issues despite FY jubilation - Just Style
Crocs grew their revenue by 65% for the year and broke the coveted $2B in sales mark for the first time. Not just beating topline expectations, they also beat margin goals by 5% and purchased another adjacent line of business that’ll grow their revenue at least another $650M. For all sakes and purposes, Crocs did everything right, yet their stock got slammed because the company expects supply chain delays to dent first-quarter revenues by $40 million. That estimate is also without considering another potential variant shut down that could further delay their inventory management. Without a robust revenue model that allows Croc to offset that $40M loss or ensure that they can capture that demand the next quarter, the markets reacted accordingly.
Macy's stock soars premarket after earnings beat estimates, company raises dividend - MarketWatch
Recently, when anyone discussed Macy’s or their retail peers, it was often about which activist firm was about to take over. In particular, for Macy, Jana Partners has been incredibly vocal at calling for Macy’s to separate its retail business from its eCommerce business to get a better valuation from the market. That wasn’t a part of Jeff Gennette, the current CEO’s plan, as he could peacock today when reporting Macy’s earnings. Instead, Macy’s believes they’ve found their sweet spot in balancing their digital business, private brands, and small, off-mall stores allowing. Macy’s saw their store sales improve 28% during the quarter when compared to last year (when there weren’t vaccines yet), their eCommerce sales grew 12% the quarter and are expecting to see 37% of overall sales in 2022 because of the investments they made this year in their omnichannel initiative.
What's at Stake for the Global Economy as Conflict Looms in Ukraine - The New York Times
As we await what happens next in the Russia Ukraine saga, we should well know the supply chain ramifications that’ll come through to this conflict. The EU imports 80% of its natural gas, and Russia handles 41% of the natural gas imports and 27% of the oil imports. With already high energy prices, we can expect that any disruptions to gas and oil imports to the EU will affect the rest of the world, as they’ll either cannot fulfill their energy needs or have dramatically raised prices to do so. Likewise, Ukraine supplies 12% of the entire world's grain exports and 16% of global corn exports, particularly for the Middle East and Africa, supplying 40% of its wheat and corn exports. Regardless of what happens, if conflict ensues, prices will rise for everyone around the globe.
2 Takeaways
Continued supply chain disruptions will continue to affect inflation.
Even if a company has fantastic earnings for a quarter, most of the world is still worried about what’s to come, given that supply chains are still behind schedule. As we saw with Crocs, despite beating earnings, revenue goals, and estimates, the market did not reward them for their performance but punished them for calling out the future reality that’ll be affected by their supply chain.
These supply chain headaches continue plaguing business owners but will continue affecting the end consumer. As every restaurant and retailer appears to be raising prices to deal with the labor shortage, rising prices, and supply chain shortages, these costs get passed onto the consumer.
With the recent conflict between Russia and Ukraine escalating, we need to remember that Russia accounts for 41% of the natural gas imports and 27% of the oil imports in the EU. Keeping in mind that energy costs in the EU have been surging over the past year, going from 20 euros to 180 euros a megawatt-hour, any increases in energy cost will have a dramatic impact. Even in America, gas prices are expected to rise over $5, showing just how connected the world is now, at every level.
Inflation will continue to weigh on everyone’s mind, from consumers to investors. As central banks can offer a clear and robust response, the real influencing factor will stem from the supply chain’s unsureness and how global insecurity, labor shortages, and the following pandemic variant may throw a wrench into the supply chain.
Balancing demand is the most complex task for companies moving forward.
Crocs saw impressive financial performance and a Wallstreet sell-off because of their supply chain fragility, and Macy’s saw the opposite reaction. Instead, the street rewarded Macy’s handsomely, as they could meet consumer demand this Holiday season and not deal with supply chain weaknesses causing them to change their sales strategy or volume, unlike their competitors, because they stocked up early.
Similarly, we saw something similar with Home Depot, which continued to see strong sales because of a consistent demand for home improvement despite the world opening back up. Paired with the investments they made earlier (like getting freight ships), Home Depot balanced the expected seasonal demand for home improvement while not suffering from lack of inventory (not having enough) or excess inventory (putting a lot of items on sale) and not see their margin suffer because of poor inventory management or forecasting.
The consistency of Home Depot and other retailers has shown the importance of accurate forecasting and inventory management paired with shrewd logistics oversight. Typically, most businesses that do well at two of those three outperform and stand out from their competitors. Still, as a nod to ever-increasing competition, it needs to perform all three for a company to continue growing.
All businesses will need to have suitable systems to manage all three to create the right plans and execute the right strategies that can showcase profitable or incremental growth. As 2022 continues to move ahead, the internal discipline and operations needed to navigate the new normal will become more apparent. However, executing and getting the proper growth will become the following problem. The correct kind of growth will be even more critical after March 15, where everyone expects the Fed to raise rates by at least half-percentage-point as they try to tame inflation.
1nsight
Businesses that want to continue growing need to redefine demand as it continues to be affected by inflation
As inflation and our ability to handle it remains a mystery given the inconsistency of the supply chain, the future for many businesses will depend on its ability to manage how they plan to grow in 2022. And the only way to plan how you want to succeed means you need to define what growth looks like for your business and vertical. Especially as business gets more sophisticated due to all the things that need to go “right” to be successful, we will see an ever vicious war for talent and services.
All the moving pieces will make it easy to get distracted, so it’s never been more critical for any business to understand what their growth needs to look like and why. Only then will you be able to understand all the short- and long-term externalities that’ll come from inflation, the supply chain, and labor. Previously, so many businesses were just comped to one another to identify winners and losers. Now, with finite suppliers, labor, and talent, business owners and operators can no longer afford to mimic or follow the playbook of industry leaders. In the short term, this may be the first time there isn’t enough to go around.
Getting the third or fourth-best supplier option to be paired with the third or fourth-best fulfillment, which is then paired with the fourth or fifth-best advertiser so that you can mimic the industry leader, will mean you’ll no longer be able to meet the demand that’s called for to grow. Businesses could operate under those principles in the past because there were no consequences for the upside.
Now, we live in a new paradigm, where unintended upside today can easily mean the wrong balance and a brutal awakening of the next quarter. Mis-forecasting your demand means selling out early today, means you better have something prepared for tomorrow, or you’ll just find yourself with a lot of hopeful prospective customers that’ll leave upset and empty-handed. And with the current realities, you can’t just turn off your demand generation because your competition will gladly take all of it and won’t be willing to give them back… causing you to spend more to pick things back up when you’re finally ready too. And when that happens, that’s when the gap widens.
As we’ve seen during the pandemic, the companies that know what they’re doing just keep on widening the gap. Regardless of drops in valuation, many businesses that saw meteoric rises during the pandemic have not changed their operation strategy because of the valuation change. Instead, they’re just getting more efficient, either by force or ideally by choice. As the world sits on the precipice of an upcoming war as well as unknown supply constraints, rising inflation, and another potential variant shut down, now is not the time to be forced to change your business.