It doesn’t take a brain surgeon to suss out a host of negatives from the brutal earnings results and conference calls from Target and Walmart this week.
All of them come to the same conclusion though: Consumers are being financially battered by inflation and the economy is slowing much quicker than Wall Street economists have factored into their 500-step multi-factor models.
“It has been a wild 48 hours in retail,” Jefferies Analyst Steph Wissink said on Yahoo Finance Live (video above). “We heard from Walmart yesterday and Target today. One of the things that stood out to us was the common patterns. We are seeing both companies are signaling that their stores are seeing strong traffic versus e-commerce. Both are seeing high costs to execute their business. Consumers are moving more towards essentials versus discretionary merchandise.”
“The last thing is not going to abate anytime soon,” Wissink added. “There were a lot of conversations among investors that maybe inflation for the consumer has peaked, but these companies are giving us very different signals that we are still seeing costs rise more than prices.”
Wild may even be an understatement. The two retailers have shed more than $65 billion in combined market cap in the past two sessions alone as investors rerate both stocks for the leaner quarters ahead.
The poor quarters from Walmart and Target have unleashed major sell-offs in other household name retailers such as Best Buy, Dollar General, Dollar Tree, and Costco.
Here are three takeaways that caught the analytical eyes of us here at Yahoo Finance.
1. Inflation has gotten out of control
Walmart and Target both saw serious margin pressure as inflation in the supply chain bore down on financial statements. The discounters were caught flat-footed in not raising prices fast enough to offset inflation’s ugly tentacles.
“We never expected the kind of cost increases in freight and transportation that we’re seeing right now,” Target chairman and CEO Brian Cornell told Yahoo Finance. Target estimates it may see an additional $1 billion in freight and transportation costs this year tied to near-record-high fuel and diesel prices.
The inflation theme was similar at Walmart, too.
“We still feel great about the business model of the company. I feel good about the year. It’s that we’re dealing with some things that we haven’t dealt with before, and we’ll work our way through it,” Walmart CFO Brett Biggs conceded in an interview with Yahoo Finance.
2. Bloated inventories
Both retailers saw inventories balloon by more than 30% in the first quarter, reflecting price increases by vendors but also consumers pulling back on discretionary purchases like home goods.
Walmart noted general merchandise markdowns were $100 million greater than expected.
“Most of the increased inventory and related costs were related to buying over the past several quarters with a keen focus on in-stock, and now we’re in a short period of rightsizing it. The current sales strength and warmer weather in the U.S. give us confidence in our ability to work through this fairly quickly and strategically,” Biggs told analysts on the earnings call.
Analysts say it will take several quarters for the retailers to work through their excess inventories, pressuring margins further in the process.
3. Price increases are coming
Walmart and Target will now look to push through price increases on shoppers where they can in a bid to fend off inflation. The duo will also try to find cost savings in other parts of their operations to protect margins.
“First, we are going to try to hold costs with suppliers — but if prices go up in a certain way, then we’ll have to take prices [up] on items,” Biggs explained.
“We’ve got to make sure that we don’t lose our value positioning,” Target’s Cornell said. “So we are selectively and surgically passing on costs in certain categories where our cost of goods have skyrocketed, but from a freight transportation standpoint, that we’ve had to look at other ways to drive efficiency in our operations.”
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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Source: https://finance.yahoo.com/news/3-takeaways-from-brutal-earnings-out-of-walmart-and-target-165903767.html