Author: smarttalksucce

Rising inflation and global supply chain strains remain top of mind for retailers as they navigate the post-holiday earnings season. But also making its way into conversations with analysts and investors is Russia’s invasion of Ukraine, which entered its second week on Thursday.

A number of retailers have temporarily halted operations in Russia, either as a signal of corporate condemnation of the war or because these companies are unable to carry on business in the country due to imposed sanctions impacting logistics.

Some, such as Victoria’s Secret, are warning that uncertainty created by the war could weigh on business in the first quarter and potentially beyond.

The biggest concern for many retailers will likely be the duration of the crisis, said Chuck Grom, an analyst with Gordon Haskett.

“You have to think the longer it goes on, the more problematic” it gets, Grom said. “In other words, the consumer spends more time getting absorbed with the situation.”

Retailers are already trying to gauge future demand in still unpredictable times and keep shelves stocked without ordering too much merchandise. Businesses are trying to lure consumers back into their stores as Covid cases wane and immunity increases. Yet it could prove to be trickier than this time a year ago, when President Joe Biden and Congress signed off on stimulus payments to families.

Pittsburgh-based clothing retailer American Eagle Outfitters said Wednesday it is taking the war between Russia and Ukraine into consideration when forecasting its outlook for the year, though it didn’t offer specifics on how much of a financial impact the war could have on consumer demand. American Eagle doesn’t operate any brick-and-mortar shops outside of North America and Hong Kong, but it ships merchandise to 81 countries.

Chief Financial Officer Michael Mathias said on an earnings conference call that the retailer is cognizant of multiple factors currently at play: Rising inflation, the fact that American Eagle is beginning to lap a period during which stimulus payments were issued to many consumers last spring, and continued disruption in the global supply chain, “including the war in Ukraine.”

“Against this backdrop, we’re taking a cautious view,” Mathias said.

American Eagle warned that its earnings will decline in the first half of the year compared with prior-year levels, in large part due to heightened freight costs. It does expect earnings to rebound in the back half.

Lingerie retailer Victoria’s Secret, which has a small presence in Russia, also made a slight mention of the war. When it reported its fiscal fourth-quarter results Wednesday, it said inflation and “global unrest” will create a challenging environment in the coming months. Victoria’s Secret issued a disappointing outlook for the first quarter but said it believes the third quarter will be an inflection point for better results.

Kohl’s Chief Executive Michelle Gass was asked Tuesday, on an earnings conference call with analysts, about the situation in Ukraine and how it might hurt the department store chain’s business.

“We’re prepared that there’s going to be an environment of a lot of uncertainty. We certainly contemplated that as we guided this year,” Gass said on the call. “We’ll stay close and be responsive.”

All of this could weigh heavily on the American consumer. Companies, from food producers to auto makers, will likely bear greater burdens from skyrocketing oil prices and ongoing supply chain headaches. Price increases are often passed on to the customer.

“There are implications for U.S. retailers in the higher cost of energy, because of the interruption of and disruption in energy markets,” said David French, senior vice president of government relations at the National Retail Federation, the leading retail trade group. “And there are implications for U.S. retailers in food prices, because of the significance of Ukraine and Russia … as major agricultural regions.”

“Those are probably the biggest first-order effects,” he said, adding that many U.S.-based retailers have modest exposure to Russia and Ukraine, if any. He did mention Ukraine being a major hub for companies outsourcing IT help, however, which could become a larger issue if the crisis persists.

French emphasized that even during the pandemic, consumers have been reporting that their confidence is down but at the same time they’re shopping as if consumer confidence is way up. Holiday retail sales in 2021 surged a record 14.1% from prior-year levels, according to NRF, in spite of inflation and the spreading omicron variant.

BMO Capital Markets analyst Simeon Siegel echoed this sentiment. “Setting aside what it says about humanity, as we learned with Covid, people are really good about not letting things bother them until it knocks at their door,” Siegel said.

At the same time, companies have been quick to take a stance on the Kremlin’s invasion of Ukraine.

Furniture retailer Ikea said Thursday it is closing all of its stores in Russia, stopping production in the country and halting all exports and imports to and from Russia and Belarus.

“The war has both a huge human impact and is resulting in serious disruptions to supply chain and trading conditions, which is why the company groups have decided to temporarily pause Ikea operations in Russia,” the company said in a statement.

Nike, fast-fashion retailer H&M, and coat maker Canada Goose have all said they’re suspending sales in Russia, too.

A statement on Nike’s website in Russia says the sneaker giant can’t currently guarantee product delivery in Russia. A Nike spokeswoman told CNBC that given the rapidly evolving situation, along with increased operational challenges, Nike decided to pause its business in the region.

“We are deeply troubled by the devastating crisis in Ukraine and our thoughts are with all those impacted, including our employees, partners and their families in the region,” the spokeswoman said.

British online fashion retailers Boohoo and Asos have also both suspended sales in Russia. On Thursday, the off-price retailer TJX said in a securities filing that it would be selling its 25% stake in the low-cost Russian apparel retailer Familia, which has more than 400 stores in Russia. As a result of the sale, TJX said it may have to report impairments charges.

Craig Johnson, founder of the retailer consulting group CGP, said he expects that retailers or brands with a presence in central and eastern Europe are likely already developing, if not implementing, contingency plans.

“Contingency plans are most critical for in-store and back office employees and hours of operations,” Johnson said. “But they also include plans for physical and cyber security, vendor and public communications, and trimming or delaying merchandise receipts as warranted.”

This story is developing. Please check back for updates.

Initial claims for unemployment insurance totaled 215,000, the lowest tally since the beginning of the year and fewer than Wall Street estimates, the Labor Department said Thursday.

Economists surveyed by Dow Jones had been looking for first-time filings to come in at 225,000 for the week ended Feb. 26.

A separate report from the Bureau of Labor Statistics showed that nonfarm productivity rose 6.6% in the fourth quarter, slightly less than the estimate for 6.7%. However, unit labor costs rose 0.9%, well ahead of the expected 0.3%.

On jobless claims, last week’s total represented a decline of 18,000 from the previous week and was the lowest since Jan. 1.

Continuing claims, which run a week behind the headline number, edged higher to 1.48 million. However, the four-week moving average, which smooths out weekly volatility, moved down to 1.54 million, the lowest level since April 4, 1970.

The total of those receiving benefits under all programs fell further, dropping to 1.97 million, a decline of 62,625.

The jobless numbers come a day before the BLS’ closely watched nonfarm payrolls report. Wall Street is looking for a gain of 440,000 in February, following up the much stronger-than-expected 467,000 total in January.

Companies are still trying to fill nearly 11 million job openings at a time when the worker shortage has expanded to unprecedented levels. There are about 4.4 million more employment openings than there are unemployed workers looking for jobs.

Wages have surged in the current environment, with average hourly earnings up 5.7% in January, a level well above anything seen in the pre-pandemic environment, according to Labor Department data going back about 15 years.

Unit labor costs continued to increase in the last three months of 2021, though at a lower pace than the previous quarter due in large part to the jump in productivity. A 7.5% rise in hourly compensation was largely offset by the 6.6% productivity rise. For the full year, unit labor costs were up 3.6%, down from the 4.3% gain in 2020.

Federal Reserve policymakers are about to tackle the inflation issue with an expected series of rate increases.

Fed Chairman Jerome Powell on Wednesday called the labor market “extremely tight” and said he expects the first rate hike to come at the central bank’s policymaking meeting later this month.

Federal Reserve Chairman Jerome Powell still sees interest rate hikes coming, but noted Wednesday that the Russia-Ukraine war has injected uncertainty into the outlook.

Powell said he sees a series of quarter-percentage-point increases coming, though he left open the possibility of moving more aggressively should inflation persist.

In remarks prepared for dual appearances this week before House and Senate committees in Congress, the central bank chief acknowledged the “tremendous hardship” the Russian invasion of Ukraine is causing.

“The implications for the U.S. economy are highly uncertain, and we will be monitoring the situation closely,” Powell said.

“The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain,” he added. “Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook.”

Later, he said the Fed wants to get inflation under control, but “the bottom line is that we will proceed but we will proceed carefully as we learn more about the implications of the Ukraine war on the economy.”

The observations come amid 40-year highs for inflation in the U.S., complicated by a Ukraine war that has driven oil prices to around their highest levels in a decade. Consumer prices increased 7.5% from a year ago in January, and the Fed’s preferred inflation gauge showed its strongest 12-month gain since 1983.

Powell and his fellow policymakers have been indicating for weeks that they plan to start raising benchmark interest rates to tackle inflation. He reiterated the stance Wednesday that the process will involve “interest rate increases,” along with indications that the Fed eventually will start reducing its bond holdings.

“We will use our policy tools as appropriate to prevent higher inflation from becoming entrenched while promoting a sustainable expansion and a strong labor market,” he said. “We have phased out our net asset purchases. With inflation well above 2 percent and a strong labor market, we expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month.”

Powell said the likely path for rate hikes will be increments of a quarter percentage point, though he said he would be open to more aggressive moves if inflation gets worse.

“We’re going to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain moment,” he said under questioning from House Financial Services Committee members. “To the extent that inflation comes in higher or is more persistently high than that, we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings.”

The Fed will start cutting the size of its asset holdings after rate hikes have begun, he added.

Since the beginning of the Covid pandemic, the Fed has been buying Treasurys and mortgage-backed securities at the fastest pace ever, driving the total holdings on the central bank balance sheet to nearly $9 trillion.

Powell said the reduction will be conducted “in a predictable manner,” largely through allowing some proceeds from the bonds to roll off each month rather than reinvesting them.

On the economy, the chairman said he still expects inflation to decelerate through the year as supply chain issues are resolved. He called the labor market “extremely tight” and noted strong wage gains, particularly for lower earners and minorities.

“We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation,” he said. “We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price stability.”

Markets have fully priced in a rate increase at the March 15-16 meeting but have decreased expectations for the rest of the year since the Ukraine war began, according to CME group data. Traders are now pricing in five quarter-percentage-point increases that would take the benchmark federal funds rate from its current range of 0%-0.25% to 1.25%-1.5%.