Bad News from US Retail Giants amidst Hot Inflation

High Inflation Environment

The Covid-19 pandemic forced central banks and governments around the world to implement unprecedented monetary and fiscal stimulus programs to support the economy and the labor market.

Furthermore, the pandemic also disrupted global trade, supply chains and forces of supply and demand, a problem that has been exacerbated by the recent war in Ukraine, which also sent commodity prices higher.

All these factors have led to a surge in Inflation, which has hit multi-decades highs in the US and elsewhere. US Headline Consumer Price Index jumped 8.5% year-over-year in March, which was the highest since December 1981, before easing slightly to 8.3 in April.

This has forced the US central bank to make combating inflation its top priority and embark on an aggressive monetary tightening path, having delivered its first rate hike since 2018 in March, before doubling down with the biggest increase in 22 years earlier this month.

US Retailers Take a Hit

This high inflation and high interest rate environment is bad not only for consumers who see their disposable income shrink, but for corporations as well, as its eats in to their profitability and margins. Retail chains especially the brick and mortar ones, are particularly vulnerable to this environment.

Target

Retail giant Target (TGT.us) released its financial results for fiscal Q1 (period ended in April) on Wednesday, with its bottom line taking a bit hit. [1]

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Sales grew by a timid 4% year over year to $24.83 billion, far lower than the $30.616 billion generated in the previous quarter. Beyond the top line however, things were much worse, since Target saw its Net Earnings plunge more than 50% year-over to $1.009 billion, while its Operating Margin was squeezed to 5.3%, from 9.8% a year ago and 6.8% in the previous quarter.

The Gross Margin Rate was 25.7%, compared with 30% a year ago, with the company citing "…actions taken to address lower-than-expected sales in discretionary categories, as well as costs related to freight, supply chain disruptions…" among the factors responsible for these results.

The firm sees more pain ahead, since it lowered its forward guidance, now projecting Operating Margin of around 6% for full fiscal 2022, while for Q2 it expects it at around 5.3%

TGT.us plunged after the results, losing around 25% at the time of writing.

Wal-Mart

A day earlier, rival and economic bellwether had also reported a small Revenue increase but saw its bottom line getting crushed. Q1 FY2023 (period ended in April) Operating Income slumped 23% year-over-year to $5.3 billion. [2]

On the Earnings Call, CFO Brett M. Biggs said that Q1 Gross Margin Rate decrease by 89 basis points compared to last year, adding that "consumers are feeling inflation pressures". [3]

CEO Doug McMillon commented that "U.S. inflation levels, particularly in food and fuel, created more pressure on margin mix and operating costs than we expected". [2]

Upward Pressures to Inflation?

Target's forward guidance suggest that it does not expect things to improve soon and the Fed's actions to tame inflation only target the demand-side and not the supply-side price pressures.

One option that retailers have in order to mitigate their lower profitability is to increase their prices. Given the highly competitive nature of the industry, this may not be a good option, but if every company faces the same issue, then this may not be matter much.

Such action could exacerbate inflationary pressures, which would make the Fed's job even harder and would cause more pain to consumers.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 18 May 2022 https://investors.target.com/news-releases/news-release-details/target-corporation-reports-first-quarter-earnings-1

2

Retrieved 18 May 2022 https://corporate.walmart.com/media-library/document/q1-fy23-earnings-release/_proxyDocument

3

Retrieved 27 Jun 2022 https://s2.q4cdn.com/056532643/files/doc_financials/2023/q1/CORRECTED-TRANSCRIPT_-Walmart-Inc.(WMT-US)-Q1-2023-Earnings-Call-17-May-2022-8_00-AM-ET.pdf

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