Can't handle inflation: Walmart and Target stocks crash after reports

Can't handle inflation: Walmart and Target stocks crash after reports

TargetTGT $152.86 Buy

Can't handle inflation: Walmart and Target stocks crash after reports

Wal-Mart StoresWMT$119.77BuyService in partnership with Tinkoff Investments. Quotes are updated every 15 minutes

Quarterly results of American retailers upset investors. Companies have increased spending on transport and personnel, and their profits fell.

Walmart and Target report first quarter results, which is over 30 April. That's how they did it.

Target (TGT)

Compared to the same quarter last year:

  • sales — $25.2 billion (+4%);
  • cost of sales - $18.5 billion (+10,4%);
  • net profit - billion dollars (−51,9%).

Target sales were slightly better than analysts' expectations. This result was not easy to show due to the high base effect.: a year ago, stimulus checks were handed out to Americans and the retailer's revenue then grew by 23%.

But Target's profitability disappointed investors. The company reported, that its logistics costs have increased greatly. This is not surprising., because the supply failures are still not fixed, and US gas prices rose to record highs 1,1 $ per liter.

Target also expanded staff and reported high staff costs. She also raised salaries.. The U.S. has a record low unemployment rate 50 years, so the company has to attract workers with higher pay.

As a result, Target's operating margin fell by half compared to last year., with 9,8 to 5,3%. And with it the profit of the company. Retailer expects, that in the current quarter and at the end of 2022 the margin will be approximately the same - about 5-6%.

Target reported 18 May before the main session. As a result of trading, the company's shares fell by 25%, to 162 $. This is the fall 2020 level.

Walmart (WMT)

Financial results year on year:

  • sales - $141.6 billion (+2,4%);
  • cost of sales - $106.8 billion (+3,5%);
  • net profit - $ 2 billion (−24,8%).

Walmart quarterly results slightly different from Target: higher-than-expected sales and poor margins due to inflation and costs.

According to Walmart, at the end of the year, its revenue will increase by 4%, while profits fall by 1%.

Walmart reported a day before Target, 17 May. During the day, the company's papers fell by 11,4% - maximum since 1987. 18 May, for the company with Target, they fell another 6,8%, to 122 $.

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Drop more than 10% in a day for a "boring" and value beta company 0,5 - it's a lot. Beta is a measure of a stock's volatility compared to the broad market.. If it rises or falls on 1%, then Walmart stocks usually change in price by half - only by 0,5%.

Not protected from inflation

Retailers are often referred to as hedge against inflation., because they sell the necessary goods and can pass their costs on to buyers.

This is controversial for at least two reasons.: attention of regulators to rising food prices and high competition. Walmart and Target said this themselves back in the fall of 2021.. They declared, that they won't raise prices, to keep loyal customers. All this companies have confirmed and now.

Retail is a low-margin business. Retail chains receive the main profit due to high turnover, Therefore, even a small increase in cost leads to a drop in profitability. And if Walmart and Target still can't handle inflationary pressures, then their margin together with the shares, probably, will continue to fall.

Can't handle inflation: Walmart and Target stocks crash after reports

Market reaction

Walmart and Target are the face of American retail and a mirror of consumer sentiment. Analysts follow the reports of these companies, to determine the financial well-being of buyers.

The head of Walmart said, that customers began to take small packages more often. For example, half a gallon of milk instead of one. They also cut spending on non-essential items.: clothes and electronics.

Food is a low-margin commodity. Therefore, a large share of such products in total sales reduces the retailer's margin.. And to sell essential goods, stores have to give a discount, which also affects profits..

According to Walmart, over the year, the average check in supermarkets grew by 3% only due to inflation, as the volume of the basket has decreased. Seems, the consumer - the main driver of economic growth - is waiting for the economy to slow down and begins to spend money wiser.

Among other things, and for this reason, the major stock indices had their worst session since June 2020. Investors are afraid, that the margins of other companies may also fall. S indices&P 500, Nasdaq и Dow Jones 18 May fell by 4-5%, shares of discounters Dollar General and Dollar Tree - by 11-14%.

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