Market Insights

Retailers are having a bearish week as inflation hammers major chains like Walmart and Target.

The pain began on Tuesday when WMT reported sales growth of 2.4 percent, but a 23 percent drop in operating income. TGT followed by announcing that revenue increased by 4 percent. However merchandise costs rose 10 percent and back-office expenses increased 5.6 percent. Throw in $601 million of depreciation, and operating income contracted by 43 percent.

Investors reacted swiftly, sending WMT down 11.4 percent on Tuesday — its biggest drop since January 1996. TGT fell even more yesterday: down 25 percent. That was its worst selloff since “Black Monday,” October 19, 1987. Both stocks are now back to new 52-week lows.

Ironically, the historic selloffs occurred in the same week that the Commerce Department reported that retail sales rose more than expected in April. The previous reading for March was also revised sharply higher. That shows people are spending money, and stores are selling. The problem is profit margins, one of the primary catalysts for movement in the stock market.

After all, WMT and TGT reported better-than-expected top-line sales. But both missed bottom-line estimates because of higher costs. WMT sees the trend continuing, saying revenue would grow 4 percent this year but earnings would drop 1 percent. Management teams cited issues like wage inflation, supply-chain problems and higher fuel costs.

Costco Crumbles

Companies with exposure to similar forces also fell sharply. Costco (COST) plunged 12 percent, its largest one-day decline since 2003. Dollar Tree (DLTR) had its worst day since the coronavirus pandemic struck in March 2020. Kroger (KR), Best Buy (BBY) and Dollar General (DG) also plunged.

The drops weighed heavily on both the consumer-discretionary and consumer-staples sectors. They often move in opposite directions because discretionaries are economically sensitive while staples are often considered safe havens. But yesterday, consumer staples like Coca Cola (KO), PepsiCo (PEP) and Procter & Gamble (PG) suffered their biggest selloffs in over two years.

Home Depot and Lowes

Home Depot (HD) and Lowe’s (LOW) seemed to buck the bearish trend. HD beat estimates across the board as contractors purchased materials for renovations. LOW reported the opposite of WMT and TGT, with bottom-line profits beating forecasts despite weak top-line revenues. The reason was strong demand for higher-ticket items like appliances and lawnmowers. HD and LOW still struggled as higher mortgage rates weigh on housing stocks.

TJX (TJX) also surprised to the upside. The parent of TJ Maxx and Marshalls took less of a hit than feared from costs and inventories, which management attributed to its unique bargain-based business model. TJX jumped 7.1 percent, its biggest rally in 1-1/2 years.

In conclusion, retail and consumer stocks continue to struggle with inflationary and supply-chain issues. The main troubles relate to supplies of merchandise, wage pressures and fuel costs. Home-improvement chains have been immune from the pressures for now, but have yet to bounce as investors remain wary of the broader sector.