more inventory problems

Last spring, retailers Target and Walmart both announced that they were having inventory problems. There were two aspects to the issue: too much stuff, and the wrong kind of stuff to appeal to consumers who had suddenly decided the pandemic was over.

The companies faced two problems with the inventory they had: how to get the unwanted merchandise off the selling floor (and where to put it, once it was gone), and how to get back the money they had tied up in the inventory, either by resale or return. (A side note: my guess, which I haven’t tried to verify, is that during the time of supply constraints, merchants pretty much gave up the right to return unsold merchandise. So turning the gods back into cash mostly meant selling it at a discount). The big trick in doing this is to get the right balance between getting the most money while minimizing the risk that the merchandise goes out of style or is surpassed by newer, better versions.

My sense is that this inventory adjustment is mostly done.

What’s replacing it as a stock market worry is the situation of the producers of stuff that sold like hotcakes during the pandemic. For such manufacturers, demand is returning to normal. This is somehow taking both Wall Street analysts and at least some of the companies themselves by surprise. For example:

Hasbro (HAS), for example, reported overnight. EPS were lower, on sales of traditional toys slowing down. It also appears that the executive in charge of this part of the business has been asked to leave. If so, this suggests top management may have realized the implications of WMT/TGT but other managers decided not to slow production down. HAS was down by about 6% in the aftermarket but has trimmed the decline to -5% as I’m writing this.

Intel (INTC) reported, as well. In a jargon-filled presentation, the CEO basically said the same thing. Sales of the company’s chips for PCs and servers have both been weaker than expected, and are likely to remain so through mid-2023. In this case, the decision to slow down production on the signals customers were sending out may be more complex. Given it takes about three months to fabricate the most advanced semiconductors, keeping production going, not pulling back may have been the profit maximizing (meaning loss minimizing) solution. Also, given the substantial ground INTC has lost to competitors over the last half-decade, management may have thought having inventory on hand may have been more crucial than it might have been if INTC had more market power. Still, INTC was down by about 9% overnight, and is -7% as I’m writing.

What I find most interesting is that announcements like these still have the power to shock. But this is mostly due, I think, to my not having completely adjusted to the fact that stock market trading is controlled by fast-reacting but relatively mindless trading bots.

For anyone knowledgeable, and bullish, about the stocks involved, it seems to me the right tactical decision would be to buy on this weakness. Ignorant, I’m happy to stay on the sidelines, though, rather than dabble in either.

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