First Quarter Retail Earnings Fail a Predictable “Shock”

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Earnings reports from the nation’s largest retailers for the first quarter recently turned Wall Street into a sweeping collapse. Executives at major chains blamed low profits and margins on a sudden, “unexpected” change in consumer spending behavior — from business to experiences, such as travel and dining.

Analysts who followed the industry declared their disappointment and lowered their investment ratings.

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Share prices plummeted for five days, after which the industry’s balance sheet had a total of nearly half a trillion dollars in equity,

A Bloomberg headline shouted, “more horrors awaitReuters called it “retail apocalypse,

But no one should have been surprised. The inventory that retailers are now stocking up was predictable — in fact, it was predicted.

In December, in this column, we warned about the whipsaw effect of a tangled supply chain. Even before the holiday season ended, it was clear that late arrivals were going to fill retailers’ warehouses with goods that were out of season and, as it turned out, out of step.

That’s exactly what happened.

Target reported that its inventory increased 43% in the first quarter as a plethora of merchandise like TVs and kitchen appliances. Walmart said its inventory increased by 32%.

An analyst cited in the Reuters story claimed Wall Street was “angry” at Walmart and targets on the rosy outlook for 2022 that the companies presented in March.

But in early February, the US Commerce Department was reporting that the percentage of consumer spending on goods had fallen for the second straight month, while spending on services increased.

The Wall Street Journal reported the trend Under the explicit headline, “Consumers are spending on services such as food and travel.” ING’s chief international economist James Knightley told the Journal that consumers started 2022 with a “general fatigue of buying material things”.

So the earnings disappointment shouldn’t have come as much of a blow to someone who was paying attention. As we warned in December, “the next quarter or two is likely to see huge discounts.”

The meltdown was a remarkable event, but hardly an apocalypse. While inflation and higher labor costs took a bite out of margins, Walmart said its comparable sales grew 3%. Target grew 3.3% in the quarter, on top of 23% growth in the same quarter a year ago. Target sales have grown for 20 consecutive quarters now.

What happened in the first quarter often happened in the retail industry when merchant buyers were in sync with consumers.

Yes, the pandemic, supply chain reforms, and Russia’s invasion of Ukraine are all unforeseen events that have affected the retail industry.

Still, the retail industry has a way of embracing the kind of real-time tracking and research that’s available today to be able to help companies steer clear of mistakes and serve up fewer surprises for Wall Street.

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