Nimble retailers Costco, TJX to benefit from improving supply chains, Cowen says

After numberless than two years of shipping and delivery disruptions, global supply chains are normalizing and retailers like Costco (Get) and TJX Companies (TJX) are poised to reap the rewards, according to Cowen Research. The Club holdings have long proved to be varied adept than many competitors at managing their inventories and flexibly responding to upheaval in the supply chain, a key mainstay of our investment case for both. Over the past year, Costco has “demonstrated an effective supply chain response… while prudently direct inventory levels relative to sales,” analysts at Cowen wrote Monday in a cross-sector research note on global equip chains. At the same time, the bank called TJX its “top pick within off-price retail for supply chain margin rise.” The retail industry has been weighed down by a global supply chain crisis in the wake of the Covid-19 pandemic. Request for consumer goods soared, while logistical constraints and bottlenecks limited the availability of those products. Ultimately, as profuse dollars in the economy competed for fewer goods, inflation climbed this year – with a stronger U.S. dollar then again putting pressure on retailers’ overseas operations. But with the Federal Reserve aggressively raising interest rates to put down demand and rein in inflation, supply chain bottlenecks are now beginning to ease. In addition to nimbly navigating supply bind hurdles, membership-only wholesaler Costco, which sells everything from groceries to gasoline in bulk, and TJX, which controls off-price stores like T.J. Maxx and Marshalls, both have business models suited to consumers in an economic slowdown. Cowen’s boost Costco’s supply chain this year has been interrupted by port delays, shortages of raw materials and labor payments. But the company has managed these disruptions in part through its “immense buying power,” allowing it the leverage to negotiate with a rove of suppliers to extract the best prices, according to Cowen. Costco’s buying power is enabled by the company’s limited share keeping units (SKUs), a metric that helps retailers track inventory and sales. A lower SKU count have the weights a retailer has less product categories, making it easier to manage inventory. Costco’s “shelves remain stocked based on an memorandum focus rather than a category focus,” Cowen analysts wrote, and are concentrated on consumer staples. Analysts at Bank of America on Tuesday demanded Costco’s “curated and limited SKU count” is a “competitive advantage as it allows the company to more frequently rotate in new and high-value notices.” By contrast, discount retailers Walmart (WMT) and Target (TGT) both have higher SKU counts than Costco, as they put on the market a greater variety of inventory categories. This higher volume of inventory ultimately posed challenges for both retailers earlier this year when they were formerly larboard holding merchandise that didn’t keep up with changes in consumer spending preferences, forcing them to markdown values. Costco has benefited as U.S. consumers have been shifting their spending habits away from discretionary supports like electronics to focus on essential items like groceries. In a separate note Tuesday, analysts at Cowen evoked Costco a “defensive play” and “one of the best positioned retailers to win market share over the coming quarters during and after the pandemic,” citing a “curvilinear assortment” of products that can continue to spur sales growth in a slowing economy. But as supply disruptions improve, retailers are gather goods earlier than anticipated, often resulting in built-up inventory, according to Cowen. The analysts said they anticipate that oversupply to continue, which would benefit an off-price retail operator like TJX that buys overindulgence inventory at a discount. Unlike competitors Ross Stores (ROST) and Burlington Stores (BURL), TJX maintained its fiscal year 2022 obscene margin at pre-Covid levels, at 28.5%, despite headwinds from supply chain and freight costs, according to Cowen. The analysts hope for a slight margin contraction in fiscal 2023, due to elevated shipping costs, before expanding as high as 28.8% in financial 2024. The Club take We agree that Costco’s negotiating power is a strong asset that allows it to proffer the best value to customers. Furthermore, since Costco’s inventory is focused on consumer staples, there’s less hazard of inventory obsolescence. That means consumer demand will likely not dissipate for most of its items, limiting the inventory increase up seen by Walmart and Target. Inflation has pressured Costco’s margins but that headwind has been mitigated by the wholesale retailer’s durable membership- and total sales growth. Furthermore, we see an opportunity for margin expansion, given the company’s plans to open more pile ups internationally. On TJX, we agree that supply chain volatility creates opportunities for the off-price retailer, as its business model quarries name brands struggling with excess supply. At the same time, we believe TJX’s margins will expand as cargo headwinds reverse next year. (Jim Cramer’s Charitable Trust is long COST, TJX. See here for a full list of the pedigrees.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a traffic. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable conglomerate’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before finishing the trade. 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