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Gerald Storch on supply chain: 'You can’t just say we’re gonna open one port 24 hours'

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Gerald Storch, Storch Advisors CEO and the former Toys "R" Us CEO breaks down the latest retail sales number and what to expect from the supply chain crisis.

Video Transcript

SEANA SMITH: Consumers are continuing to spend-- outspending what we expected to see in the month of September. Retail sales jumping just around 7/10 of a percent. We're looking at a couple of retailers moving to an upside-- moving to the upside as a result. You can see some of those names on your screen right now-- Walmart, Target, TJ Maxx, Macy's, Amazon among the names gaining today.

But let's talk a little bit more about this. We want to bring in Jerry Storch. He's Storch Advisors' CEO, the former CEO of Toys R' Us.

Jerry it's always great to speak with you when we get these retail sales numbers out. I think some people were a little bit nervous about what the Delta variant could potentially do, what supply chain issues might be doing to retail sales, now yet we're seeing another number that beat expectations. What's your big takeaway?

GERALD STORCH: Well, I thought all those fears were frankly quite overblown and kind of poppycock, because the only way you can look at this as an operator is to say, OK, the pandemic is starting to end, what do I compare these numbers to? People are in this habit, as your chart shows, of comparing this month's sales to last month's sales on some kind of seasonally adjusted basis by the Census Bureau. You know, that number is so engineered, I don't even know how to make any sense out of it.

What I can make sense out, I can say, let's go back before the pandemic began in 2019. What were sales in 2019, the last time we had sort of a level playing field, and what are they today? And guess what, for month after month after month, they've run about 20% higher than the equivalent month in 2019.

In 2021-- so for example, in July, sales were 18% higher than in 2019. In August, there were 19% higher, in September 21% higher, so I would say it's about 20% within any kind of reasonable standard error room for measurement. That's-- that's actually phenomenal and unprecedented. If I told you two years ago, when we'd never heard of the pandemic, that two years from now sales would be 20% higher than they were in 2019, you'd think I was some kind of a-- of a extreme optimist, to say the least-- you'd probably use other words.

So sales have been phenomenal. Consumers on fire. This is no surprise to me. I've said it's coming. It's been consistent.

By the way, that's the funny thing, or the interesting thing. Month after month after month, even as headlines try to make sense out of nonsense stuff like variations from month to month in this, you know, 7/10 here, and then they adjust it and truly 9/10-- you know, that kind of thing. When the real number is just this enormous increase, which is why the ports are clogged and why everything else that's going on.

SEANA SMITH: Yeah, Jerry, speaking of the ports being clogged, you know, you and I exchanged emails after Nike was out with its results, and that's just one of a number of retailers that came out warning about the supply chain crisis, what that could potentially do to sales, at least in the immediate term. But I mean, you're-- you are somebody who has been an executive at a number of retailers. When you see an issue like this, I guess, how big of a worry is it for some of these companies? And if you were advising one of these firms, what would you tell them?

GERALD STORCH: So first of all, it depends on who you are. So Nike is a fine company, but they have a concentrated source of supply in Vietnam, and that was-- that's the problem that they alluded to. So they had a specific issue, and you know, it means that they're going to be short their sneakers and they're not going to have the kind of sales increase that they're looking for.

It's very different if you're a Target, or a Walmart, or a Costco where, you know, if you don't sell one, you'll sell the other. If you're Amazon, if you don't sell one brand, you'll sell the other brand. There's still plenty of merchandise out there.

Keep in mind that exports from China are up 30%, you know? Even goods through the Port of LA are up 20% to 30%. So it's not like they have an expanded capacity, it's just they couldn't possibly contain this unprecedented increase in demand. So if you're a retailer and you have-- and you're broad lines like Target, Walmart, Costco, Home Depot, you have plenty to sell and you're going to do just great. If you're Nike, all you have to sell is your own brand, and that could be an issue if you have that kind of constriction.

Now, how do you fix it when you have a problem? Look, it's a lot bigger-- you know, I'm not going to get into the politics of this, but you can't just say we're going to open the port, one port, 24-hours a day, and suddenly the problem's solved. That's like, you know, like a hot dog eating championship-- it doesn't do any good, because you still got to swallow it all.

And so even if you could bring all those ships in, and all of that cargo got unloaded in LA by some magic, there'd be no one to pick it up and take it to the import distribution center of the retailer. And not only that, if they got there, the import distribution center or the retailer, it would be full already. There'd be nowhere to put it away!

And even if they did, there'd be no one to pick it and pack it to send it on another truck, if there were a truck to get it there. There wouldn't be, but if there were, to send it to the next DC down the line, the regional distribution center for the retailer, where they have to process it again. And again, they have a labor shortage, and then it has to go to other trucks to get to the stores. So it's a pipeline, and you can't just fix it by looking at one place.

So the answer is, you have to set up a war room. It's like a-- you know, use whatever metaphor you're comfortable with that day, whether it's Manhattan Project or going to war-- and you have to look at the whole pipeline and find every constriction point and work on them, and I don't see anybody doing that. We're certainly not doing this as a country right now by saying, oh, well, there's a port 24 hours ahead.

That's just, you know, it's almost-- it's political. It's almost laughable as a solution to something that's as serious-- you know, serious, multifaceted problem. So you don't go to sleep, is what you do, and you solve it.

SEANA SMITH: Yeah, Jerry, we've been talking to a number of guests over the last couple of days, and they were simply saying, OK, you can open the ports-- exactly what you were just saying. You can open the ports, but even once you get some of these goods onto land, you simply don't have the labor that you need in order to get, like, truck drivers for example, in order to get these goods to where they need to go. Jerry, how-- I guess when you take a look at a timeline of how big of a problem this is, the fact that you're saying this isn't something, obviously, that's going to get resolved overnight, or it sounds anywhere in the immediate term, I guess how big-- how long do you expect us to be dealing with this issue?

GERALD STORCH: Oh, I think as-- as long as demand keeps being elevated double digits like it is now-- and make no mistake about it, that's what we're seeing. We're seeing compound annual rates of growth and demand of over 10% at year, right? So as long as the economy is so hot, as long as consumers have so much liquidity, and so much-- so much money to spend, then demand is going to be very high.

And meanwhile, obviously, as demand supply issue, supply of labor is depressed, whether or not that's because people are frightened to go out because of COVID-- I think there's some of that for sure-- and so as COVID heals, then there'll be more labor onto the market, which would be fantastic. Or whether it's some people are, you know, the so-called proverbial being paid not to work and they're comfortable with that, as long as that lasts then you're going to have that kind of issue. Eventually you reach an equilibrium. Capitalism is pretty cool.

But I think it's going to take it, you know, well into next summer or so until this is resolved. You know, unfortunately, what would really resolve it fast would be some kind of a set-- a big setback, a correction in the stock market, some kind of resurgence in COVID, something else that would suppress demand so much you wouldn't have a problem anymore. We don't want that to happen.

I think it's much more likely demand will stay high, it will start to abate after the holidays, come down to more single-digit year over year type of a growth, like it-- like in the good old days, you know, and then meanwhile supply and labor will slowly increase, and we'll solve the problem. People are working on it. It will be solved, it's just not going to be solved quickly.

SEANA SMITH: Jerry, if you had to pick one or two retailers right now that you think are best positioned heading into the next couple of months, what would they be?

GERALD STORCH: Well, there's a few categories. There's a big multi-line retailers who, you know, are vast companies, have a broad assortment. So if they don't have one thing to sell, they'll sell you something else, and that's Walmart, Target, Costco, you know.

Then there's the people who are so well-positioned for where the consumer's head is right now, so people like Home Depot, for example. I mean, one of the biggest increases, if there was any surprise to me on this month's retail sales report, was the giant increase yet again in building materials. And they have been showing compounding double digit rates and increase in their sales. So Home Depot is very good.

Dick's Sporting Goods is very strong. You know, you see people selling and wanting to buy a lot of sports equipment, so demand is very high. People who are winners before the pandemic who should be winners when things reopen, are like TJ Maxx or Dollar General.

And then I always have to include Amazon, because keep in mind, they have their own supply chain. And so they deliver all the way to your house. No one else has that.

And so, you know, everyone else has to deal with FedEx or UPS who are having huge problems right now. And I know as a fact they're telling retailers, you know, we're not going to ship everything that you want, and the prices are going to go up, and we're not going to meet your deadlines. You better make sure our customer buys well before Christmas and all that. Amazon didn't have that problem, at least, you know, everyone's got issues of getting labor, but they have their own-- own army, if you will, so they can handle this themselves. So I think they're in very good position.

People I don't-- I just don't trust the numbers on are the people who are losing before the pandemic, or someone who took victory laps, like a Bed Bath Beyond, or Macy's, or Kohl's, and said, oh, see, we fixed all our strategic problems because our sales did better than expected during the pandemic. Well, they're still not as good on that two-year stack I'm talking about as all the other names that I mentioned. And meanwhile, they haven't really done anything to address their fundamental strategic issues.

It doesn't address fundamental strategic issue to add a little more private label, or to, you know, remodel your stores, or something. It just-- they've got core issues about who they are, and what they are, and how much of their business should be online, how much in the stores, and how they're going to appeal to customers in a marketplace that's fundamentally changed and they have not addressed those issues. So mall-based apparel, department stores, et cetera, I think-- the people that were losing before, I think they're going to come [? out ?] of the [? pandemic ?] and lose again.

GERALD STORCH: We will see. Jerry Storch, always great to get your opinion. Thanks so much for taking the time to join us. CEO of Storch Advisors, former CEO of Toys R' Us. We look forward to having you back again soon.