Walmart and Target Are Inflation Bellwethers. The Stocks Are Rising.

Analysts had expected about £151 billion in second-quarter sales for Walmart and expect £26 billion for Target.

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Walmart[1] and Target ‘s[2] quarterly earnings give investors some insight into how big retail is handling inflation–and stocks across the sector will likely feel the aftershocks. Today’s better-than-feared result from Walmart is already lifting that stock, along with Target and the SPDR S&P Retail[3] exchange-traded fund. The two companies are important bellwethers for the retail industry and consumer spending.

And in recent months, both Walmart (ticker: WMT[4] ) and Target ( TGT[5] ) have issued preliminary announcements lowering[6] their guidance for the quarter and the rest of the year. Analysts expected about £151 billion in second-quarter sales for Walmart and £26 billion for Target. Walmart’s quarter wasn’t as bad as its original warning, bolstering hopes that the worst of the sector’s pain may be behind it, with the company commenting that its inventory levels–which previously led it to issue big discounts–had peaked. Investors will be eager to hear if Target can deliver a similar message tomorrow.

Yet Walmart also said it had canceled billions of dollars of orders to get its inventory under control–a fact that could tamper enthusiasm about a rebound in consumer demand. Walmart stock was up 6.2%, at £140.84, in recent trading, while Target stock was up 6%, at £182.56. Given the duo’s size and massive customer bases, they are at the center of the market’s biggest story so far this year: inflation[7].

On the one hand, higher prices are forcing consumers to spend more on essentials, a trend that analysts expect to have improved the retailers’ positioning in groceries. But at the same time, inflation appears to be siphoning consumer demand away from general merchandise, apparel, and other goods with better margins. “In 2Q22, Target should benefit from the strength of its grocery business, supported by favorable macro trends–continued at-home consumption and high inflation,” Telsey Advisory Group analysts Joseph Feldman, Sarang Vora, and Cristina Fernandez wrote in a preview note. “However, the strength in food and essentials should be largely offset by softness in discretionary categories.”

The analysts added that they expected higher supply-chain costs and the shift toward food and essentials to compress retail gross margins by a little more than 6 %, to 24%. According to FactSet’s consensus estimates, Target[8] is expected to deliver earnings per share of 79 cents, far lower than its £3.51 in EPS for the second quarter last year. Analysts were looking for EPS of £1.62 at Walmart, which would lag last year’s second-quarter profits, but only by about 16 cents a share. 

When Walmart cut[9] its own projections for operating income in late July, shaving it by 13% to 14% for the second quarter and 11% to 13% for the full year, the company hinted at how higher prices were affecting consumer spending.

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“Customers are choosing Walmart to save money during this inflationary period, and this is reflected in the company’s continued market share gains in grocery,” the company said. But higher expenditures on food meant spending less on general merchandise, forcing Walmart to mark down items to move through inventory.  Walmart, whose market capitalization of roughly £358 billion makes it one of the 20 largest companies in the world, followed up the lower guidance by cutting[10] about 200 corporate roles in a restructuring effort the firm confirmed with The Wall Street Journal last week.

That being said, there are signs that inflation may have peaked. July’s consumer price index remained near a four-decade high, but falling prices for gasoline and fuel lowered the CPI’s year-over-year percentage increase last month. And although consumer confidence remains weak, the University of Michigan’s preliminary survey results for August, which were released Friday morning, also read optimistically.

Its sentiment index[11] improved more than anticipated, rising to 55.1 after ending July at 51.1. (Economists surveyed by The Wall Street Journal were expecting the midmonth gauge to come in at 52.5.) Walmart reported earnings Tuesday, while Target’s[12] arrive Wednesday. Their lower profit guidance sent share prices down for their retail peers as well, many of whom also report their results in the coming weeks.

Dollar General[13] ( DG ) and Dollar Tree[14] ( DLTR[15] ) earnings are due on Aug.

24, while Home Depot[16] ( HD ), Bath & Body Works[17] ( BBWI[18] ), and Lowe’s[19] ( LOW[20] ) issue their quarterly reports this week. Most retail stocks have also bounced back since Walmart’s profit warning spooked the market. The day after that updated guidance came out in late July, the SPDR S&P Retail ETF (XRT) fell 4.2%.

Over the past month, however, it is now up more than 18%.

Write to Teresa Rivas at [email protected][21]

References

  1. ^ Walmart (www.barrons.com)
  2. ^ Target (www.barrons.com)
  3. ^ SPDR S&P Retail (www.barrons.com)
  4. ^ WMT (www.barrons.com)
  5. ^ TGT (www.barrons.com)
  6. ^ lowering (www.barrons.com)
  7. ^ inflation (www.barrons.com)
  8. ^ Target (www.barrons.com)
  9. ^ cut (www.barrons.com)
  10. ^ cutting (www.barrons.com)
  11. ^ sentiment index (www.barrons.com)
  12. ^ Target’s (www.barrons.com)
  13. ^ Dollar General (www.barrons.com)
  14. ^ Dollar Tree (www.barrons.com)
  15. ^ DLTR (www.barrons.com)
  16. ^ Home Depot (www.barrons.com)
  17. ^ Bath & Body Works (www.barrons.com)
  18. ^ BBWI (www.barrons.com)
  19. ^ Lowe’s (www.barrons.com)
  20. ^ LOW (www.barrons.com)
  21. ^ [email protected] (www.barrons.com)