The Market Implications of Walmart (WMT) and Target’s (TGT) Earnings Misses

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At the start of this week, I wrote a piece suggesting that the big retail earnings this week would, unusually, be more about what actually happened last quarter than about forecasts and forward guidance. As it turns out, both Walmart (WMT) yesterday and Target (TGT) this morning disappointed on both fronts, missing in terms of EPS and offering weal guidance. The market reaction, particularly in TGT this morning, has been spectacular. That stock has lost nearly a quarter of its value in premarket trading, while WMT is around 2.5% down after losing around 10% yesterday. That is a combined $60 billion or so of wealth destruction in 24 hours.

On the bare EPS and revenue numbers, both reactions look to be overdone. Walmart reported earnings of $1.30 per share versus expectations for $1.48 on revenue of $141.57 billion versus $138.94 billion, while Target earned an adjusted $2.19. That was well below estimates for $3.07 per share but came on higher than forecast revenue from an increase in sales. However, in both cases, the way in which those numbers were achieved was what traders didn’t like.

They each reported some changes in consumer behavior, with a shift away from big ticket items like appliances and TVs and from higher margin apparel sales, and towards basics such as food and “experience” spending like restaurant gift cards, with sales of toys growing as children’s’ birthday parties grow again post-pandemic. The positive spin on that is that it suggests that the problems for Target and Walmart are temporary. Flush with stimulus money and optimistic after their first vaccine, consumers made up for a lean year by making big ticket purchases. However, if you bought a washing machine, dryer and dishwasher a year ago, you don’t need any of them now, whatever the price.

As I said, that indicates that some of the behavior changes are temporary and that spending on high-margin items will recover. That, in turn, means that these two stocks will bounce back, but there is another implication here that is worrying for the broader market.

Both Target and Walmart reported a big increase in their input costs, as you might expect given that inflation is running at over 8%, but neither felt able or willing to pass on the inflationary pressure to their customers. As a result, they saw big reductions in margins and, more worryingly, expect that to continue for some time. That has implications for stocks that go way beyond what it means for the big box stores. If they are not passing on their rising costs so far, it means that more price hikes are yet to come, and thus inflation could get worse before it gets better.

At the very least, inflation data will be slow to respond to the Fed’s tighter monetary policy. It suggests a quite significant time lag between input price rises and retail price hikes that will make the impact of policy changes hard to assess from quarter to quarter.

Jay Powell, however, is obviously not factoring in a lag like that between rate hikes and inflation numbers, as he said yesterday that the Fed would “keep pushing” until inflation has been tamed. That raises the specter of the central bank maintain a rising rate environment too long and forcing the economy into a recession from which it will be hard to recover quickly.

I have often said that quarterly earnings reports are snapshots of performance by individual companies over the previous quarter and, as such, should usually not be used as the basis for conclusions about the overall market. There were some elements of that to the earnings from WMT and TGT this week, but their combined size makes them a good indicator of overall consumer and corporate behavior, and the message they sent was not encouraging. They told us that input prices remain elevated and that consumers are spending in a more conservative manner as they feel the pinch of inflation. But they also indicated that the real impact of that inflation is yet to be felt. Given that the fed is now hiking rates with the zeal of a convert, that is not good news for stocks in general, and the bumpy ride for markets looks set to continue.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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