WMT and TGT are apocalyptic, but they are not the worst

Analysts Notebook wrote a column · May 20, 2022 07:04

Retail investors aren't faring much well, finding themselves stuck in a vortex of alarming nosedives in the stock prices of retail companies. Bellwether companies like $Target (TGT.US)$ and $Walmart (WMT.US)$ led the pack, posting sagging Q1 profits due to rampant inflation and increasing costs.

Bulging inventories sting

Same-store sales appear strong to weather the storm of inflation. Target registered a 3.3% increase in comparable-store sales while Walmart logged a similar 3% gain year-over-year.

Yet profit margins were squeezed due to rising costs, including wages, transportation and storage of inventory, among which the last item stands out as the main culprit, with Target’s and Walmart’s product inventories up 43% and 32% from a year earlier, respectively.

Part of the reason is that ahead of last holiday season, retailers ordered with plenty of cushion in mind to prevent empty shelves. And now they are carrying too much stuff that consumers no longer want so much of, such as seasonal apparel, home appliances and furniture.

Customer spending shifted away from 'hardlines,' which include furniture, appliances, and electronics." Target CEO Brian Cornell said.

The 'worst' of retail

While Target and Walmart seem to hold the line in terms of same-store sales growth, other small-to-medium retailers stay barely above the water, seeing revenues skidding amid inflation.

Source: MarketWatch, FactSet

The first data column includes the companies' reported changes in comparable-store sales for the most recent reported quarters. The next columns are consensus estimates for the next four quarters among analysts polled by FactSet.

Some of the companies are expected to show impressive recoveries in same-store sales over the next year, following recent declines. The analysts expect improvement next quarter for both Target and Walmart, with a rather consistent set of estimates across the board.

The consensus price target for Target falls off the cliff, down 21% following its earnings announcement. The consensus target price for Walmart also declined 6%. Here's a summary of analysts' opinions about the same 17 stocks: