Making Sense of Target, Walmart, and Disappointing Retail Results


Note: The following is an excerpt from this week’s article. Earnings Trends report. You can access the complete report which contains actual historical and detailed estimates for the current and next periods, please click here>>>

Here are the key points:

  • Disappointing results from flagship retailers have raised questions about consumer health in the current inflationary environment. But the problem seems to be one of execution by failing traders, rather than consumer spending, at least at this stage.
  • For the Zacks Retail segment, we now have the results for 93.6% of the segment’s market capitalization in the S&P 500 Index. Total Q1 revenue for these retailers is down -18.8% from the same period last year, with revenue up +7.7%, with 61.5% beating EPS estimates and 73.1% beating revenue estimates.
  • The 61.5% percentage of EPS overruns is the lowest since 53.8% in the fourth quarter of 2018 and the second lowest in the last 5 years.

It is tempting to interpret the WMT Walmart and Target TGT earnings disappointments as indicative of a moderation in consumer spending. Faced with rising costs for fuel and other basic necessities, not to mention growing rumors of a slowing economy in the face of rising interest rates, consumers would be justified in limiting their spending in a certain extent.

We believe the Walmart and Target reports still reflect a very strong consumer spending environment. Consumer spending will eventually slow in response to Fed tightening, but we haven’t seen much evidence of that in Q1 earnings reports; nor from Walmart, Target or other consumer-centric companies.

Instead, these big-box retail leaders missed out due to poor execution and not having the right merchandise in stores. Consumers didn’t buy patio furniture at Walmart or appliances at Target, but they did shop a lot at Home Depot HD.

The challenge for Walmart, Target and other retailers is not just having the right merchandise, but also dealing with higher expenses related to freight, payroll and other items.

You can see it in Walmart’s -24.4% decline in Q1 earnings, even as its revenue grew by +2.4%. For Target, earnings decreased by -44.9% while revenue increased by +4%. The market expects these companies to pass on these higher expenses either to their customers or to their suppliers.

The market punished them for being surprised at the decline in profitability even though they failed to protect their margins.

Looking ahead to Q1 earnings season beyond these retailers, total S&P 500 earnings are expected to rise +9.5% on revenue up +13.5%. This is a significant deceleration from what we have seen in previous quarters, as you can see in the chart below which gives an overview of earnings on a quarterly basis.

Image source: Zacks Investment Research

The chart below presents the overall earnings picture on a yearly basis, with the growth momentum expected to continue.

Zacks Investment Research
Image source: Zacks Investment Research

The degree of uncertainty about the outlook is growing, due to a lack of macroeconomic visibility in a context of tightening monetary policy by the Fed.

The situation in Ukraine is exacerbating pre-existing supply chain issues, which, combined with their impact on oil prices, are weighing on the inflation picture in ways that are difficult to predict. The evolving trend of earnings revisions will reflect this macroeconomic backdrop.

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Target Corporation (TGT): Free Stock Analysis Report

Walmart Inc. (WMT): Free Inventory Analysis Report

The Home Depot, Inc. (HD): Free Inventory Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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