Below is a chart and brief excerpt from today's Early Look written by Retail Sector Head Brian McGough.
How, may I ask, with more headwinds than we’ve seen this cycle, can the consensus be modeling that margin expectations in 2021 not only surpass 2019, but match 2018 levels – and THEN go up by another 40bp to 8.7% in 2022? Mind you that even in a very strong retail economy, we saw a 20% hit to the retail margin rate from 2015 to 2019 – and that is almost entirely due to the dilutive impact of e-commerce on margins. Now we’ve got 2x the ecomm margin pressure due to increased online adoption, higher wage costs, and a meaningful credit risk – and the consensus thinks that numbers are going to surpass pre-covid highs? Someone please explain to me how this makes one lick of sense.
While the model will trump valuation almost every time, we’ve got to at least acknowledge that with margin expectations reversing course and headed higher after an entire cycle’s worth of a decline despite increasing cost pressures, the XRT is trading at 27x forward earnings – or about 20x ‘normalized’ earnings (whatever that means). This compares to 14x pre-Covid, when fundamentals were decidedly better – by a country mile. Again, makes little sense.