Many retail stocks have dropped significantly this week following a slew of unimpressive earnings reports from some major players.
The retail sector has been getting hammered this week, with stocks such as Target (TGT), Walmart (WMT), and Costco (COST) all seeing double-digit share price drops. Respective drops of 24%, 17%, and 12% have been seen from each of these retailers in the last two days, with speculation rising that other consumer-facing companies could be about to meet a similar fate.
The reason behind all of this, you ask? It all comes down to one thing — earnings.
Both Target and Walmart missed earnings expectations in spectacular fashion this week, sending the broader retail industry into a tailspin. But when we dig a little deeper, some more commonalities begin to appear that could be very important when analyzing stocks in the current market environment.
How is inflation affecting retail?
Inflation was one of the keywords mentioned in both Target and Walmart’s earnings calls. US inflation is currently at a nearly four-decade high, sending costs skywards for many firms. Retailers have had to lower their margins in an attempt to keep customers spending money in their stores. This drastically impacts revenue when done over any sort of sustained period.
Some retailers tried to get ahead of rising inflation by buying in stock in bulk. This is a calculated risk, as consumer sentiments can change rapidly during an uncertain market. Demand for certain types of products can decrease, and companies can be left holding onto large amounts of unsellable stock that will now cost even more money to store. Factor in lingering supply chain issues that could see some of this stock arrive too late for seasonal promotions, and you’re looking at needless costs that can build up rapidly.
The Bottom Line
The retail sector is dealing with some particularly tricky headwinds at the moment following a year that saw a significant spending boost as the world opened up as the COVID-19 pandemic eased.
Rising inflation and supply chain disruption look likely to continue to wreak havoc on the industry at large for the foreseeable future. Companies will have to move swiftly in order to keep prices at the perfect balance between affordable to the consumer and profitable to the firm.
It’s important to note, however, that some retailers will undoubtedly fare better than others. The home improvement retail sector, for example, appears to be navigating the current market quite well — as evidenced by The Home Depot’s (HD) impressive earnings call earlier this week.