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June 30, 2022

Retailers stocks plummet as inflation bites into profits

Market commentary by eToro analyst for Romania, Bogdan Maioreanu



Retailers are finding themselves under increasing pressure from inflation as they are paying more for their products but are unable to fully pass on the price hikes to consumers, who are hurting as well.

The largest US retailers had a very bad couple of days despite the Retail Sales report in the United States that came as expected by the market, with a month on month increase of 0.9%. Weak earnings reports sent the shares of Target (TGT) and Walmart (WMT) into two digit losses, dragging with them into single digits losses other mall retailers like Costco, Macy’s, Nordstrom, Gap, American Eagle Outfitters and Victoria’s Secret. Amazon also fell 7.2%. The US stock market sank, Dow losing more than 1100 points with the S&P losing 4% of its value, the largest drop from June 2020.

The good retail sales figure shows that the purchases continued regardless of the rampant inflation, but many of the purchases are made on credit in order to keep up with price increases. According to the New York Fed a record 537 million credit cards were opened in the first quarter of this year showing a 31 million new cards increase over last year. A recent survey showed that 76% of the respondents are cutting spending signaling strong headwinds for the retail sector.

Walmart (WMT), the largest brick and mortar retailer in the world, had on Tuesday the largest daily decline in share price since October 1987. Its shares fell 11% following a weak earnings report and guidance. The company reported adjusted earnings of 1.30 dollars a share on 141.6 billion dollars in revenue. Analysts were expecting a profit of 1.48 dollars a share on sales of 138.8 billion dollars. Walmart’s U.S. comparable sales grew 3%, more than analysts’ estimate of 2.4% growth. The company also lowered its guidance to reflect higher supply-chain costs and continued pressure from inflation. Though for the 2023 fiscal year, Walmart is expecting a 4% increase in consolidated net sales, up from previous guidance for 3% growth, earnings per share, however, could decrease about 1%, or be flat compared with last year excluding divestitures. Guidance issued in February was expecting earnings per share to rise by 5% to 6% excluding divestitures.

During the earnings report conference Walmart acknowledged that the company was not able to fully address or pass along to customers some of the cost increases and this impacted profitability. As the supply chain situation is still complex and inflation is forecasted to stay high for a longer period of time, the company is working to better mitigate this issue.

Target, another very large US retailer reported weak sales figures, operating income dropping to 1.3 Billion dollars from 2.4 Billion dollars. Gross margin fell to 25.7% of sales from 30.0% a year ago due to higher markdown rates and costs related to freight, supply chain disruptions, and increased compensation and headcount in distribution centers. This is shown that Walmart weak figures were not a fluke but mainly an industry wide issue.

Walmart is seeing an increase in traffic in the stores but emptier baskets with higher value of purchases. This is consistent with the survey that shows only 22% of respondents are struggling to make basic payments for food, rent and loans, 29% struggling a little and 43% having no problems with the increase in prices.

High inflation is propping up the sales of Home Depot (HD) – the US do it yourself chain of stores. The company posted earnings per share of 4.09 dollars for the first quarter, beating analyst estimates by 0.39 dollars. Meanwhile, revenue increased more than the expectations by more than 2 billion dollars to reach 38.91 billion dollars for the quarter. The latter figure was also noted as the highest in company history. In terms of guidance Home Depot now predicts comparable-sales growth of 3% this year, upgraded from a prior “slightly positive” sales growth. It also projects that earnings per share, excluding some items, will rise by mid-single digits after forecasting a low-single-digit increase last quarter. Its direct competitor Lowe’s (LOW) showed earnings per share of 3.51 dollars for the first quarter, 0.28 dollars above expectations, but missed revenue estimates. Company’s management blamed low spring temperatures for delaying the start of DIY projects.

Home Depot showed us that inflation is already producing its effects. The first-quarter data showed that the number of customer transactions fell 8.2%, but the increase in prices helped the average purchase price surge about 11% year over year. It is possible that customers and contractors are still not scared by inflation or are rushing to finish projects fearing even higher prices in the future.


Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.


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