A broad swath of retail stocks imploded on Wednesday, led by Walmart and Target, after swelling inventories and rising costs for fuel, food, staff and transportation caught the two retail bellwethers off-guard.
The dive came after Target reported mixed results on Wednesday, and after Walmart reported similar results a day earlier. Both caught investors by surprise, as the companies cited "unexpected" costs and gave weaker outlooks on either profits or margins.
Target stock crashed 25% in the stock market today, its biggest percentage drop since October 1987. Walmart sank 6.8%, after tumbling 11% on Tuesday.
The results led to heightened concerns ahead for those chains and their smaller rivals, who perhaps have less sway in negotiating their own costs with suppliers. And the reports landed as investors remain preoccupied about the prospect of a recession and what one analyst called a "bifurcating U.S. consumer."
Along with fuel and shipping costs, Walmart struggled to manage its head count. And it saw some customers shift to cheaper grocery brands.
Target, meanwhile, said it hadn't anticipated the drop in demand for things like TVs and appliances. During its earnings call, management cited a "rapidly shifting macro backdrop" and said "It's clear that many of these pressures will persist in future quarters."
Among other discount retail stocks, Dollar Tree tumbled 14%. BJ's Wholesale fell 16%, with earnings due early Thursday. Costco slid 12%. All report earnings next week. Dollar General gave up 11%.
The damage also extended to home improvement chains. Home Depot lost 5.2%. Rival Lowe's slipped 5.3%. Both chains also reported this week.
Other Retail Stocks
Rising costs for gas and groceries, launched higher by Covid's contortions of global supply chains and Russia's war in Ukraine, have perhaps left lower-income shoppers more fragile than analysts expected. And consumers were entering this year without the benefit of an influx of stimulus cash a year ago.
John Zolidis, a retail stock analyst at Quo Vadis, said in an interview that the financial outlooks retailers gave earlier this year were thought to have factored in last year's stimulus boost and other operational difficulties. Turns out, that wasn't the case.
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"What we're finding out now, two-and-a-half to three months later, is that retailers didn't have a handle at all on the environment that they were facing for 2022," he said.
"In addition to that, from a stock perspective," he continued, "you have a combination of near-term concerns on costs. Which is bleeding into all the other retailers which have yet to report, and intermediate recessionary concerns."
A Bifurcating Consumer
Despite the steep sell-off among retail stocks, sales appear to be holding up. Walmart bumped its own sales forecasts higher. Target stuck with its outlook. Retail sales in the U.S. overall rose 0.9% in April from the prior month, according to government data released Tuesday.
But along with rising fuel and transportation costs, Target noted a "rapid slowdown" in sales trends in March for products like clothing, home goods and electronics.
"While we anticipated a post-stimulus slowdown in these categories, and we expect the consumer to continue refocusing their spending away from goods and services, we didn't anticipate the magnitude of that shift," Target CEO Brian Cornell said on the big-box chain's earnings call on Wednesday.
He added, "This led us to carry too much inventory, particularly in bulky categories including kitchen appliances, TVs and outdoor furniture. And with very little slack capacity after two years of unprecedented growth, we faced elevated costs to store and began right-sizing our inventory position."
Walmart, meanwhile, struggled with what it described as overstaffing during the quarter. The company hired more people to cover employees who were out sick due to the omicron variant. But those employees who were sidelined returned more quickly than expected.
Cowen retail stock analyst Oliver Chen, in a research note on Tuesday, said Walmart's results reflected a "bifurcating U.S. consumer."
Low-end consumers' financial situations appear to be deteriorating, "... and (Walmart) is seeing trade down to private label in grocery (especially protein and dairy)," he wrote.
"WMT noted the impact of inflation on grocery pulled sales away from other categories as low-to-middle income shoppers are cutting back on nonessentials, resulting in overall flat transactions (year over year)," he continued.
Other Retailers Spared, Sort Of
Losses among home improvement retailers weren't as bad as those of other retail stocks. Zolidis noted that Home Depot and Lowe's didn't have the same issues surrounding "unexpected" costs.
He said that bigger-ticket items that Home Depot sells, like appliances, tend to do a better job absorbing shipping costs. And he said that customers for the home-improvement chains were also geared toward a smaller swath of consumers — homeowners, largely — than Walmart and Target.
"They continue to view investing in the home as a good use of their personal capital," he said of Lowe's and Home Depot's customers. "Plus you have other secular trends benefiting the home, like work-from-home, as well."
"That said," he continued, "investors are still pessimistic, I think, about the outlook for spending within those categories later in the year."
