American retail giants were marked down heavily as updates reveal bloated inventories and cast doubt on US consumer strength
Thursday 26 May 2022 Author: James Crux

US retailers suffered their worst weekly performance since 1987’s Wall Street Crash after investors were rattled by the impact inflation is having on high-profile players.

Major US outlets are struggling to pass soaring costs on to customers and low-income consumers are already struggling with soaring energy and food prices.

Q1 RESULTS DISAPPOINT

Disappointing quarterly results and downbeat outlooks triggered sell-offs at Walmart (WMT:NYSE) and Target (TGT:NYSE)

Walmart’s weaker-than-expected earnings (17 May) reflected supply chain problems and rising costs.

‘Bottom line results were unexpected and reflect the unusual environment. US inflation levels, particularly in food and fuel, created more pressure on margin mix and operating costs than we expected,’ lamented CEO Doug McMillon as Walmart cut its full year profit forecast due to rising costs.

Target’s first quarter earnings (18 May) disappointed due to ‘unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time’, according to well-respected CEO Brian Cornell.

BLOATED INVENTORIES

Alarmingly, the balance sheets of both retailers are showing inventory growth that is massively outstripping sales growth; Walmart’s inventory rose by 32% in the quarter while Target’s inventory ballooned by 43%.

As AJ Bell investment director Russ Mould explains: ‘A surge in unsold goods would suggest that either Walmart and Target have got carried away and over-ordered or consumers are starting to buy less stuff as they feel the squeeze from inflation, or perhaps somewhere in between.’

Mould warns: ‘Inventory tends to build as demand slows down, so the retailers, their shareholders and investors in US equities more generally will be hoping that bulge in unsold goods starts to decline pretty quickly.’

Other US retailers whose shares slumped included discounter Ross Stores (ROST:NYSE), which also missed first quarter forecasts. Given the squeeze on consumers, Barbara Rentler-bossed Ross said it would adopt ‘a more prudent outlook for the remainder of the year’, while department store Kohl’s (KSS:NYSE) slashed its profit and sales outlook for the rest of the year.

But it wasn’t all doom and gloom in US retail, as DIY store operator Home Depot (HD:NYSE) delivered the highest first quarter sales in its history and raised 2022 guidance, while shares in TJX (TJX:NYSE), the owner of TK Maxx discount stores, jumped on strong first quarter earnings.  [JC]

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Tom Sieber) own shares in AJ Bell.

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