Retail misery drags down stocks

Target is off around 25% today on news that its margins are deteriorating as a result of not being able to pass increasing costs onto customers. This is similar to what happened to Walmart yesterday. See the very strong relationship between margin and net income over time indicating that the future profitability of companies is largely dependent upon their ability to pass through costs and maintain margins and in turn so are future stock returns. This is a systemic issue for corporate valuations because since the GFC, margins have been dramatically higher than they had been historically. More pertinently, corporate profits are almost twice what they were as a percent of GDP as they were the last time we saw similar inflation. A reversion to this historical profit as a percent of GDP would portend poor future equity returns. (note that this chart does not reflect today's returns or 1Q22 results, stay tuned until tomorrow for an updated chart) #macrobond

Retail wreck. Target is tanking following its earnings, which came one day after gloomy results from Walmart. The entire market is tumbling on inflation worries. My story. #target #walmart #retail #inflation #earnings #stocks https://lnkd.in/gX8_6YwV

And just like that, Walmart and Target tell America - “The consumer is deeply hurting.” Margin erosion, inventory bloat, and lower sales all attributed to huge misses on Q. Target announced up to $1B in additional transportation and freight expenses associated with higher diesel & fuel costs while Walmart’s stock falls the most in a day since 1987. On the housing side, construction permits fall 3.2% for April and whisper signs of slowing for the industry - despite tight supply. In the next few months we will likely see higher margin erosion and come to realize that some analysts were horrendously off on estimates as markets reprice stagflation. High yield bond spreads have showed signs of widening (stress similar to that of 2018) and treasuries appear to be catching a bid (risk-off behavior, for now). The economy may be telling us stagflation is the base case scenario for the first time since 78-84.’ More to be seen as we move through summer/travel season. #growth #sales #housing #markets #credit

April retail sales grew a strong 8.2% in April Y/Y, though when adjusting for consumer prices (not necessarily an apples compare) retail sales were flat. Many believe that piles of cash will keep consumer spending elevated, but if so then why has consumer credit increased so dramatically (chart)? Both Walmart and Target reported earnings misses and their stocks dropped. The earnings misses were due to margin squeeze. On the sales front they noted as shift toward lower margin food and fuel (for WMT) and away from higher margin goods. Then they had higher wage and transportation costs. While they raised prices, it wasn’t enough. The other interesting piece of the earnings report was inventory build in the slower selling goods. For Target inventory levels were above pre-pandemic levels. Could that lead to discounting? Both stocks sold off significantly, and while painful I believe this is the other shoe that has to fall for the markets before we can start calling the bottom. Earnings estimates need to come down and stocks need to reflect that. #retailsales #touchstonefunds

U.S. stock indexes are getting hammered today after Target + Walmart reported that rising costs and sluggish sales were weighing on profits . . . US CPI is up 8.26% YOY and your average consumers, myself included, are skipping the guac as a result "May you live in interesting times" . . . Story in the comments below #stocks #ycharts

This is the statement from Target's CFO that is crushing the stock: 🗣 With inflation at a nearly four-decade high, Chief Financial Officer Michael Fiddelke said on a call with reporters that Target will focus on offering value, even if that means absorbing some costs. He said raising prices “continues to be the last lever we pull.” “We’ve earned so much trust over the last several years with investments we’ve made in price and we aren’t about to trade that out in the current environment,” he said.  😱 Wall Street's interpretation: If you don't raise prices and you're willing to just sit back and wait for inflation to subside, then you're basically giving up on earnings and margins. Get me out! This is really bad. #target #walmart #inflation

Walmart earnings show that middle and lower-end consumers are getting squeezed by inflation, and they are cutting back on non-essential items. Walmart stock dropped 11% yesterday. As I pulled this chart this morning, the stock dropped another 4% at the opening bell and continues to slide. Walmart missed earnings because consumers are cutting back on discretionary spending. Specifically, Walmart saw a clear shift from brand names to private label (cheaper products). One can speculate that Costco might benefit, given the popularity of Kirkland. This downtrend should spill over to Target, Kohl's, and Bed Bath & Beyond. #inflation #consumerspending

Target Short-Term Profit Challenges During 2022, Long-Term Outlook Still Strong Anyone who wants to learn #eCommerce and #retail could do much worse than go back and listen to #Target earnings calls for the past 8 years, highlighted by: * Consistent strategy. * Real data with explanations. * Steady and experienced leadership Here are a few callouts from today's Q1 2022 Earnings call. Overall: * 2022 Margin guidance ~6% as opposed to 8%+ normal target. Driven by inventory, supply chain issues and mix shift. * Q1 comp sales 3.3% growth, on top of 23% growth a year ago. * Mid-teen growth in store pickup. * Digital same-day is half of digital 1Q sales. And Half of same-day is drive-up (rather than pick-up). Unbelievable multi-year deliberate strategic story here. >Supply Chain Woes Will Persist Into 2023 * Will take over $1B in extra costs in 2022 due to freight availability and costs. Hundreds of millions in unexpected costs in 1Q due to use of spot rates -- inventory arrived both sooner and later, particularly bulky items. * Difficult to move inventory where/when they need it to. * No relief from supply chain challenges until 2023. Help is not on the way. >Category Mix Shifted in Past 2 Months Faster Than Expected * Apparel, hard lines, home small declines in same store comps. Big slowdown in electronics, appliances, TVs, outdoor furniture. * Food & Beverage low double-digit unit growth led by owned brands. * Growth in beauty, sunscreens, color cosmetics, toys, fashion-forward apparel, travel as baskets shift to experiences + going out + seasonal/holiday. >Expansion Plans Largely Unchanged * New stores still opening. 6 new local/metro sortation centers opened. 3 more planned by EOY. * 3 current sort centers handled 4.5M packages in Q1.