Weekly Brief: Is It Just Us, Or Have Retailers’ Price Tags Got A Lot Bigger?

Weekly Brief: Is It Just Us, Or Have Retailers’ Price Tags Got A Lot Bigger?

almost 2 years ago3 mins

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Retailers have been pushing up their prices to protect their bottom lines, but they have been trying to shield you from the full brunt of it.

🕰 Recap

  • US inflation hit its highest in over 40 years last quarter
  • That ate into Walmart’s profits last quarter, leading the retailer to cut its 2022 earnings outlook
  • And since those shrinking profits are a feature across the board, US stocks could be about to fall into bear market territory

✍️ Connecting The Dots

US consumer prices rose by a 40-year record of 8.5% in March, helping both Walmart – the world's biggest retailer – and Target report better-than-expected revenue growth last quarter. But here’s the bad news for the big-box behemoths: producer prices – which reflect what factories charge wholesalers for products – are climbing faster than consumer prices, with the former outpacing the latter by almost 3 percentage points in March.

The gap between the two means retailers are only passing some of their own higher costs on to customers. That, combined with soaring labor and transport costs, caused both firms to miss profit expectations by wide margins when they reported their first-quarter earnings this week. But the cherry on top was their grim updated outlook: Target lowered its 2022 profit growth forecast to 6% from 8%, while Walmart said it’s now expecting its profit to drop by about 1% this year – rather than the near-5% growth it was aiming for previously.

Investors didn’t like what they heard one bit: they sent Walmart’s and Target’s shares down 11% and 25% respectively – their biggest one-day drops since the Black Monday stock market crash almost 35 years ago. Walmart’s plunge was particularly worrying: the company – which specializes in must-haves like groceries, compared to Target’s focus on merchandise – is meant to offer investors a place to hide when a recession seems to be looming.

🥡 Takeaways

1. Americans are putting it on their cards.

Data out this week showed US retail sales grew 0.9% between March and April. But when you adjust that measure for inflation, you can see that shoppers were actually spending more for less. Their paychecks also don’t seem to have been covering what they need: Americans borrowed a record $52 billion on credit cards in March, and opened a record 537 million credit card accounts last quarter. Even crazier when you consider that it’s a country of 330 million…

2. Analysts are behind the times.

Walmart and Target are far from alone in reeling from high inflation: 377 of the S&P 500 companies that have posted first-quarter results mentioned inflation on their earnings calls, according to FactSet. That’s already a record, and there are about 40 companies yet to report. But analysts don’t seem to have taken it into account: they’ve barely tweaked their estimates for S&P 500 companies’ profit margins this quarter from where they were before earnings season began, even though inflation is starting to erode those margins. So whether they end up downgrading their estimates or companies fall short of them, investors are probably going to be disappointed.

🎯 Also On Our Radar

Despite TerraUSD’s recent implosion, the UK is pressing ahead with plans to legalize stablecoins as a form of payment. The plans won’t legalize algorithmic stablecoins (like TerraUSD), but will instead focus on those fully backed by fiat currency reserves, like Tether and USD Coin. The decision should provide a boost to the stablecoins sector – not to mention a much-needed lift to investor sentiment.

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