Higher prices stun consumers while cost and inventory pressures hit retail chains in dismal week.
Days earlier, analysts had been touting such companies as defensive shelters from the storm in tech stocks that had slashed the valuations of companies from Amazon to Netflix. Early this week, Baird named Walmart its top “recessionary playbook” idea.
But the shockwaves from Walmart and Target rippled through the wider retail sector and gave market bears a new concern: that inflation may now be biting consumers even before the Federal Reserve starts raising interest rates more aggressively.
Retailers were the biggest drivers of a broad market rout on Wednesday that pushed the S&P 500 stock index to its worst one-day fall in almost two years.
Until this week, the S&P 500’s consumer staples sub-index, which includes “big box” retailers such as Walmart along with businesses like pharmacies and food manufacturers, was still roughly unchanged for the year. The only other parts of the index that had avoided declines were energy and utility stocks, which had benefited from surging energy prices.
By the close of Thursday, however, the sub-index had fallen almost 9% and was on track for its worst week since the start of the coronavirus pandemic in March 2020.
The retailers’ earnings flagged up not just one cause for concern, but three: that price increases may have reached the limit of what consumers will tolerate, that retailers are struggling to contain their own costs, and that unpredictable demand and new supply disruptions are forcing them to build up inventories.
Some of those higher costs stem from the third force at work: a disrupted global supply chain that has left retailers scrambling to secure stock at a moment when demand for it is uncertain. “Their inventories are exploding,” Cathie Wood, chief investment officer at Ark Invest, wrote in a Twitter post on Walmart and Target.
Important debate. In the last two days, Walmart and Target reported that nominal sales increased 3-4% on a year over year basis during the quarter ended April, translating into a 3-4% year over year decline in unit sales (adjusted for inflation). Their inventories are exploding. https://t.co/i4dQKM0Hbb
— Cathie Wood (@CathieDWood) May 19, 2022
“During most of the big sell-offs of my lifetime — 2009, the [bust following the] dotcom bubble or 1987 — almost every one of these times within two years you [saw] very strong recoveries,” said Richard Thalheimer.
Thalheimer, whose portfolio is down by about $50 million from its peak, thinks markets overreacted this week and is already wondering when it will be time to consider snapping up beaten-down retail stocks.
With the combined uncertainties around supply chains, the war in Ukraine, and historic inflation, “there are going to be some choppy waters ahead”, he says.
Source: Financial Times