It ain't the earnings

Last week I was watching my usual business channel, and they were discussing the recent hammering of the clothing manufacturer Lululemon's stock. The analysts were blaming the drop in their stock by anemic marketing, unexciting products and better execution by their competitors like Nike and others in the sports clothing space. The discussion centered around which of their competitor's stock would they buy instead of the foundering stock of Lululemon. Sorry kids. I couldn't disagree more. The problem is not with Lululemon per se and the investing solution is not in the buying of some other upper tier clothing company's stock. Let's just back up a bit shall we and open up our ECON 101 books once again. It's surprising that many of the commentators featured on business channels keep missing the basics when it comes to macro-economic analysis. Lululemon, Nike and some of the other sports clothing lines exist in what I would call the highly discretionary apparel space. This means the price is higher than some of the other retailers that supply athletic clothing. Puma, Nike, Under Armour and Adidas have all had their stocks drop in price in the last year or so and it isn't because one company or another has been doing a better job of it. The fact of the matter is that all these companies sell high-end apparel, and people just can't afford to spend $80 on a yoga mat or $160 on a pair of sneakers when there are cheaper options available. As the TV analysts argued over which high end clothing stock they would buy instead of Lululemon, I sat screaming at the screen saying, "None of them!" Sure, Lululemon might be making some mistakes as compared to its competitors, but that's not the issue. The whole high end clothing space, indeed, many of the high-end retailers, no matter what they're selling are finding fewer and fewer customers that can afford higher priced items when cheaper alternatives are plentiful. It doesn't take a rocket scientist to know why these companies are struggling. It's because of the persistent and aggressive inflation that has been ongoing since the end of the COVID shutdowns. I am sure most of you reading this knew that answer already, right? Massive amounts of COVID bailout money combined with the end of the shutdown demand met with the constricted supply lines of the very same shutdowns which has spawned the worst inflation since the 1980s. Add to that the ongoing tariffs and the spike in oil prices and it makes for an inflationary fire that continues to rage on seemingly without let up. Adding insult to inflationary injury, I read a new wrinkle in the prognostication of inflation centering around Artificial Intelligence (AI). There have been several articles by Reuters, CNBC and even the Federal Reserve citing that the cost in AI will force up overall prices even further. The basic premise came about by observing the humongous run up in AI stock prices. The investment by many companies to incorporate AI in their services has been huge, close to a trillion dollars this year alone. Estimates on future spending reaches into the multitrillions. Since this massive spending adds to the cost of production of almost all goods and services, those costs will be passed onto the consumer in the way of higher prices. I keep saying inflation will not be going away anytime soon, or anytime later either. I also keep saying, "You ain't seen nuthin' yet". And you ain't. This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249 His insurance agency is BAP INC. insurance services. Email: news@moneymanagementradio.com.