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Walmart and Target Miss Quarterly Estimates, Dramatically

These are “Strange days indeed,” to quote John Lennon. Inflation rates are at a 40-year high yet based on the most recent April spending data consumers continue to spend. This was the backdrop of this week’s highly anticipated retail earnings reports by some of the biggest leading retailers. Walmart

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and The Home Depot

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reported on Tuesday, and Target

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and Lowe’s on Wednesday.

Last week I shared some traffic data comparisons from January through April of 2022 between Walmart and Target that may or may not have indicated what the first quarter of 2022 might look like. Now, as the “rubber-meets-the-road” we get a better picture on how consumers are beginning to adapt to our unprecedented times.

Walmart’s Win-Lose Reporting

For Walmart, Tuesday’s results were, at best a draw. Walmart reported good sales comps but fell quite short when it came to earnings estimates. Revenue was $141.57 billion reported for the first quarter of 2022, versus $138.94 billion expected. However, earnings per share were a clear miss at $1.30 adjusted versus $1.48 per share of expected earnings.

On Bloomberg’s The Tape, Arun Sundaram, Senior Equity Research Analyst at CFRA, discussed Walmart earnings and believed the highly unusual “miss” was attributable to a combination of high fuel costs, excess inventory, and elevated labor costs. He noted that Walmart’s needed to cushion the impact of their double-digit cost increases, by only passing on about 3% of the cost hikes to many of their economically hard-pressed consumers.

Chief Financial Officer Brett Biggs told CNBC in an interview “some merchandise arrived late and other items, such as grills, plants and pool chemicals, didn’t sell due to unseasonably cool weather in the U.S.” But the bigger factor revolves around Walmart’s top sales category of food, which saw a 9.4% increase in in April. And increased sales of lower-margin consumables at the expense of higher margin apparel and electronics are emblematic of consumers who are feeling financially pressed.

CEO Doug McMillon said in a release Tuesday morning, in order to improve the mix of merchandise the company stepped up the number of rollbacks, or price markdowns, on apparel in the first quarter. McMillon also noted Walmart expects to sell through the higher inventory levels in the coming quarters, particularly as warm weather arrives and inspires shoppers to spring for patio furniture and new outfits.

Off Target

Target has been preparing the Street for a slight reduction in Q1 margins, dropping below the prior year’s record mark of 9.8%. So much for positioning.

While comp sales grew 3.3% and total revenue of $25.2 billion represented an increase of 4% compared to last year, the bottom line missed expectations, dramatically. Target shares fell 25% to about $162 in early Wednesday trading, positioning the company for its largest single-day percentage decrease since 1987, according to Dow Jones Market Data.

Operating income was $1.3 billion, down 43.3% from the $2.4 billion in 2021, driven primarily by a drop in gross margins. Operating margin rate of 5.3% was well below expectations, driven by gross margin pressure reflecting actions to reduce excess inventory as well as higher transportation costs. Earnings per share were $2.19 adjusted vs. $3.07 expected.

Freight Fright

Target CEO Brian Cornell sited increased freight costs were due to the dramatic rise in fuel prices, that item alone represented a $1 billion hit to the bottom line. Additionally, and uncharacteristically for Target, their category mix was off due to a change in shoppers discretionary spending.

Sales of items like TVs, kitchen appliances and bicycles dropped off as consumers shifted their spending towards experience-based purchases like booking trips and going to restaurants, he said. Meanwhile toy sales grew by the high single digits as families resumed children’s birthday parties. Luggage sales were up more than 50%.

Cornell stated “throughout the quarter, we faced 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. Despite these near-term challenges, Target anticipates mid-single digit revenue growth, and an operating margin rate of 8% or higher over time.”