How did retail stocks go from ‘stagnation rules of the game’ to a lost market

Richard Talheimer remembers the last time inflation was such a big challenge for American retailers: that was when he was trying to get The Sharper Image off the ground in the late 1970s and 1980s.

In 2006, he left the consumer gadget chain he founded, and sold his stake before it went bankrupt in 2008. Since then, he’s been investing proceeds from the watches, massage chairs, iPods, and scooters he sold, and built a $350 million portfolio in stocks of Among them are Amazon, RH, and Home Depot.

“It was so much fun,” he said. Until this year.

Like economic inflation Races at levels last seen four decades ago, the retail sector that made Thallheimer rich is now making other investors poorer and fueling recession fears. This week, unexpectedly bad earnings announcements from Walmart And Goaltwo of its largest components, led to the largest stock market decline since Black Monday in 1987.

Days ago, analysts were touting these companies as defensive shelters from a storm in tech stocks that lowered corporate valuations from Amazon to Netflix. Early this week, Bird chose Walmart as the best “slack proof” idea.

But the shock waves from Walmart and Target have spread to the broader retail sector and given bears in the market a new worry: that inflation may rattle consumers now even before the Federal Reserve starts raising interest rates more aggressively.

Retailers were the biggest drivers Massive defeat in the market On Wednesday, the S&P 500 stock index plunged into its worst one-day drop in nearly two years.

Until this week, the S&P 500’s core consumer goods sub-index, which includes “big box” retailers like Walmart along with companies like pharmacies and food manufacturers, remained virtually unchanged for the year. The only other parts of the index that avoided declines were energy and utilities stocks, which benefited from higher energy prices.

However, by the end of Thursday, the sub-index was down nearly 9 percent and was on track to record its worst week since the start of the coronavirus pandemic in March 2020.

Line chart of stock price (reestablished) showing US retailers affected by declining consumers and rising costs

Retailers’ earnings not only identified one cause for concern, but indicated three reasons: This price hike may have been I reached the limit What consumers will incur, that retailers are struggling to contain their own costs, and that unexpected demand and new supply disruptions are forcing them to build up inventories.

The first of these three are closely monitored for broader economic resonance. “You have a consumer who’s starting to hold back,” said Steve Rogers, president of the Consumer Industry Center at Deloitte, whose polls show 81 percent of Americans are concerned about rising prices.

He said Americans’ bank accounts may not have changed significantly since last year, but headlines about inflation have shaken their confidence. He added that some are trading or postponing large purchases as a result, particularly in discretionary categories such as clothing, personal care and home furnishings.

Walmart, long seen as a leader in the American consumer, noted that high food inflation “pulled more dollars away from [general merchandise] Than we expected as customers needed to pay for food inflation.”

However, Rogers and others see cost pressures for retailers as a clearer driver of their changing fortunes than consumers’ decline. At Walmart, for example, US fuel costs last quarter were $160 million higher than expected — more than it could pass on to customers.

“We didn’t expect transportation and freight costs to rise the way they already were,” said Target CEO, Brian Cornell. Higher wages and costs for containers and warehouses also affect retailers’ profit margins.

Some of those higher costs stem from a third force at work: a disrupted global supply chain that has left retailers scrambling to secure inventory at a time when demand is uncertain. Kathy Wood, chief investment officer at Ark Invest, wrote in Twitter share On Walmart and Target.

Rogers said the reason they’re carrying more stock than usual is because “they’ve lived out of stock in the last couple of years and they know what that cost them.”

Walmart CEO Doug McMillon noted that some of the backlog was intentional, saying, “We love the fact that our inventory is gone because so much of it is required to be in stock.” However, he admitted that “an increase of 32 percent is higher than we would like.”

Target stocks are up even more, up 43 percent from a year earlier, and admitted they failed to anticipate shifts in consumer spending in categories from TVs to games.

“We’re not where we want to be right now, for sure,” said John Mulligan, Target’s chief operating officer, adding that the “slowdown in the supply chain” has forced it to carry more inventory as a precaution.

Wayne Wicker, chief investment officer at MissionSquare Retirement Retirement Plan Manager, said it shouldn’t be surprising to see signs of consumers curbing some spending, but said this week’s results were nonetheless a “wake-up call” for some investors because many companies have Until recently, they claimed to handle the challenges of inflation well.

Walmart and Target both made upbeat forecasts in their previous quarterly update, and didn’t previously announce any changes ahead of this week’s reports.

“Part of the price drop was a reflection of the fact that the management of these large companies gave no indication that they would miss out like this,” Wicker said.

For Dennis Chisholm, director of quantitative strategy at Fidelity, this week’s reports did not provide convincing evidence that the economy is in trouble, but they did frighten investors who were already nervous after an earlier sell-off.

Despite the deep market reaction to Target’s results, for example, its new lower forecast will only bring profit margins back to pre-pandemic levels.

‘If there is any differentiation factor compared to [previous bear markets]”It’s been earnings strength, so any kind of earnings concern gives more volatility from a near-term perspective,” Chisholm said. But, she added, “Despite a lot of anxiety in the market, it’s hard to come to an empirical conclusion that says a recession is more likely given what we’ve seen.”

Thalheimer, whose portfolio has fallen nearly $50 million from its peak, believes markets have overreacted this week and are already wondering when it might be time to consider snapping up the collapsed retail stock.

“During the most big sale of my life – 2009, [bust following the] The Internet bubble or 1987 – almost every time in two years [saw] He said.

He believes this will happen again, but with the combined uncertainty around supply chains, the war in Ukraine and historical inflation, “there will be some choppy waters ahead.”

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