After more than two years of shipping and delivery disruptions, global supply chains are normalizing and retailers like Costco (COST) and TJX Companies (TJX) are poised to reap the rewards, according to Cowen Research. The Club holdings have long proved to be more adept than many competitors at managing their inventories and flexibly responding to upheaval in the supply chain, a key pillar of our investment case for both. Over the past year, Costco has “demonstrated an effective supply chain response… while prudently managing inventory levels relative to sales,” analysts at Cowen wrote Monday in a cross-sector research note on global supply chains. At the same time, the bank called TJX its “top pick within off-price retail for supply chain margin recovery.” The retail industry has been weighed down by a global supply chain crisis in the wake of the Covid-19 pandemic. Demand for consumer goods soared, while logistical constraints and bottlenecks limited the availability of those products. Ultimately, as more dollars in the economy competed for fewer goods, inflation climbed this year – with a stronger U.S. dollar further putting pressure on retailers’ overseas operations. But with the Federal Reserve aggressively raising interest rates to suppress demand and rein in inflation, supply chain bottlenecks are now beginning to ease. In addition to nimbly navigating supply chain hurdles, membership-only wholesaler Costco, which sells everything from groceries to gasoline in bulk, and TJX, which operates off-price stores like T.J. Maxx and Marshalls, both have business models suited to consumers in an economic slowdown. Cowen’s take Costco’s supply chain this year has been interrupted by port delays, shortages of raw materials and labor costs. But the company has managed these disruptions in part through its “immense buying power,” allowing it the leverage to negotiate with a range of suppliers to extract the best prices, according to Cowen. Costco’s buying power is enabled by the company’s limited stock keeping units (SKUs), a metric that helps retailers track inventory and sales. A lower SKU count means a retailer has less product categories, making it easier to manage inventory. Costco’s “shelves remain stocked based on an item focus rather than a category focus,” Cowen analysts wrote, and are concentrated on consumer staples. Analysts at Bank of America on Tuesday said 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 items.” By contrast, discount retailers Walmart (WMT) and Target (TGT) both have higher SKU counts than Costco, as they offer a greater variety of inventory categories. This higher volume of inventory ultimately posed challenges for both retailers earlier this year when they were left holding merchandise that didn’t keep up with changes in consumer spending preferences, forcing them to markdown prices. Costco has benefited as U.S….
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