Wall Street shakes by inflation-triggered earnings hit Reuters

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© Reuters. FILE PHOTO: A shopper pulls a shopping basket at a Kohl’s department store in Brooklyn, New York, U.S., January 25, 2022. REUTERS/Brendan McDermid

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By Siddharth Cavale and Uday Sampath Kumar

NEW YORK (Reuters) – Walmart (NYSE: ), Target Major retailers like Kohl’s and Kohl’s reported earnings this week that fell short of Wall Street’s expectations by the most in at least five years, underscoring the impact four years of high inflation are hitting on U.S. shoppers’ wallets and retailers’ bottom lines.

Of the 145 retailers reporting first-quarter earnings so far, 127 cited inflation and 138 cited supply chain issues, according to Refinitiv data.

Higher staff costs, bloated inventories and more expensive fuel took a toll on retailers’ profits, sending markets crashing, with Wall Street posting its worst day since mid-2020 on Wednesday.

Department store chain Kohl’s Corp (NYSE: ) on Thursday became the latest company to report a 92% drop in adjusted profit, citing soaring inflation.

Chief executive Michelle Gass blamed an adjusted EPS of 11 cents on higher freight and wage costs and lower demand for apparel, missing analysts’ estimates by 59 cents, or nearly 85%.

Walmart Inc., the largest U.S. retailer, reported a 25% drop in quarterly profit, its first loss in five quarters. The 12.3% gap between Wall Street’s expectations and Walmart’s EPS figure was the widest since at least 2017.

For rival Target Corp (NYSE: ), which has halved profits, the gap between expectations and reality is 29%, the widest gap in at least five years, according to Refinitiv data.

“It’s kind of like the end of retail. It’s Walmart (Tuesday), and everyone thinks it’s a one-off,” said Dennis Dick, a trader at Las Vegas-based Bright Trading LLC.

“Target is losing a lot more revenue than Walmart right now, and they’re worried that consumers aren’t as powerful as everyone thinks.”

While Wall Street brokerages expect profits to be pressured by soaring fuel costs, analysts say they have been caught off guard by consumers’ rapid shrinkage and a shift to buying lower-margin basics rather than higher-margin common ones.

The increase in inventories and heavy discounts at retailers was also alarming, they said.

“The biggest surprise was inventory cuts and rollbacks (in price). I don’t think any analysts expected that,” CFRA analyst Arun Sundaram told Reuters.

Russ Mold, investment director at AJ Bell, called the inventory data “surprising.”

Target’s inventory rose 43% in the first quarter, while Walmart’s increased 32% in the first quarter as unsold televisions and bulky kitchen appliances piled up.

In some ways, retailers have become victims of their own success after figuring out how to keep stores relatively well-stocked amid supply chaos, shortages of truckers and intermittent lockdowns aimed at curbing the spread of COVID-19.

Part of Target’s broader earnings miss compared to Walmart was due to a greater emphasis on general merchandise sales, which is more focused on selling groceries and other essentials, Sundaram said.

Wall Street is also “angry” at the lack of warnings from Walmart and Target, which gave an optimistic outlook for 2022 more than two months ago, said Jane Hali, chief executive of investment research firm Jane Hali & Associates.

She added that the financial impact of the war in Ukraine and China’s prolonged COVID-19 lockdown could be part of the reason for the apparent shift in the company’s forecast this year.

“Wall Street panicked,” Harry said. “Target had an investment day a while back and they didn’t address the issues they highlighted on Wednesday. So I can understand Wall Street getting angry about that.”

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