David Berman is the king of retail investors. He started managing money in 1997, after making the decision not to be the patsy. He was frustrated that every time he was selling stock, someone smarter was buying and vice versa. So, he decided to specialize in a single industry and give it his all. With his background including a career in accounting and being the son of a furniture maker, he decided to focus on retail. His insight was that the relationship between sales and inventories can tell you almost everything you need to know about retail stocks. He has even developed his proprietary DeeBee index (derived from his name's initials) based on those statistics.
Right now, he is particularly bullish on retailers. Despite their recent run-up, he sees more room to the upside. The reason? Very low inventories-to-sales ratio compared to last year, continued control of inventories (sales down 2% but inventories down 4%), and deflationary forces throughout the supply chain. All this can translate to a very substantial increase in retailers' gross margins, and profits. The gross margins will continue expanding because there is no excess inventory, so retailers won't need to mark down any merchandise. At the same time, there is excess production capacity at all factories, shippers, etc., so retailers can cut cost from everywhere. The kicker is that since there is no excess inventory in the market and many of the weaker retailers have already shut down, there is no pressure to pass on cost savings to the consumer.
In fact, Berman believes that retailers will surprise investors even on the top line. That's because even though unit volumes will go down -- due to rising unemployment and faltering aggregate demand -- there will be much fewer markdowns, so retailers will net a much higher price per unit sold. The overall impact is questionable, but analysts anticipate a decline in sales of 1-2% whereas Berman expects a slight sales growth (maybe 0.5%). Berman also notes that after the worst recession since the Great Depression, retailers are now much more robust with stronger balance sheets and excess cash.
All this explains the recent outperformance of the retail sector (RTH beats the S&P500 by 2.7% this past month). Nevertheless, over the past 6 months and 1 year, the sector has underperformed, because there are justifiable concerns of the consumers' spending power going forward. Therefore, there may still be a chance to jump on the Berman bandwagon. Betting on the retailers ahead of what's considered to be a tough holiday season is the contrarian call here that Berman makes.
The recent market rally supports higher expectations for consumer spending, especially in the luxrury retail market, which has been particularly hit. After a strong performance though and looming concerns about the economy, the sector seems more speculative than not. Berman disagrees and makes some good points in his recent interview with Bloomberg (bit.ly/39bATp).
Disclosure: no positions