Key points
• Walmart, Target and other retailers are warning of shifts in consumer spending and in the economy.
• Consumer discretionary spending’s slowing due to inflation, which could lead to fewer jobs and inventory gluts.
• U.S. stock indices are already down double digits this year, but there could be more downside if inflation stays hot and the economy slows further.
The world’s biggest retailer on Tuesday reported profit that fell short of Wall Street expectations and downgraded its outlook for full-year earnings per share from a mid-single-digit increase to a 1% decline.
Chief Executive Officer Doug McMillon said the bottom-line results were “unexpected” and reflecte the “unusual” environment. Walmart shares tumbled more than 11% on Tuesday, the most in 35 years.
Walmart and Target, back-to-back last week, reported lower-than-expected earnings due to a surprisingly quick shift in consumer spending and higher costs, including transportation and overstaffing.
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Like Walmart, Target has been wrongfooted by the scale of the inflationary pressures in the US economy. Chief executive Brian Cornell admitted that the group faced “unexpectedly high costs”.
Signs that cost pressures are more acute than two of the country’s biggest retailers anticipated prompted investors to ditch shares of companies across the sector. Discount group Dollar General fell 11 per cent, Dollar Tree tumbled 14 per cent and Costco was down 12.5 per cent.
However, Target reported that from early March sales across apparel and homeware had suffered a rapid slowdown.
On the other side of the equation are companies absorbing equally significant hits: Walmart’s fuel costs in the last quarter were $160 million higher than planned. Another unexpected wallop comes from inventory: companies who paid the price for not having it on hand pre-pandemic are now paying the price for a lesson learned too well.
Target’s inventory is up 43% from a year ago, Walmart’s — 32%; whatever your economies of scale, all that stuff costs money to buy and store
Walmart on Tuesday said that customers were switching to cheaper, private-label items and away from branded goods, particularly in its grocery business where inflation was running at a double-digit pace.
Consumer inflation is bearing down on retailers, as it reached a 40-year high of 8.3 percent in April, according to Fox Business. As a result, Walmart was among a number of retailers last week who reported significant decreases in profits for their first quarters.
The company saw shares decrease by 11 percent on May 17, making it the retailer’s worst day in 35 years, Fox Business said. Walmart’s shares fell again on May 18, down another 7 percent.
In terms of rising food prices, the dairy sector is being hit the hardest. According to the Bureau of Labor Statistics, the average price of a gallon of milk in the U.S. is now more than $4—the highest it’s ever been, and up from $3.45 last April and $3.27 in April 2020. Data from the U.S.
Department of Agriculture (USDA) shows that in some cities—like Kansas City, Missouri; Philadelphia, Pennsylvania; and Pittsburgh, Pennsylvania—the average price of milk is already over $5 per gallon, per Newsweek.
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