Big retailers might soon be forced to offer big discounts

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Thursday, May 19, 2022

Today’s newsletter is by Brian Cheung, an anchor and reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

Yesterday, Target’s (TGT) earnings were a huge whiff.

The stock market did not care for this news, and equities across the board tanked with the S&P 500 turning in its worst day since June 2020.

The overall concern: retailers are suggesting there’s been a dramatic turn in the economic picture.

But another issue reared its head in these reports — retailers have built a stockpile of products they may have to discount to move.

“We ended up carrying too much inventory in several categories,” Target CEO Brian Cornell told investors on Wednesday.

And when companies find themselves with too many kitchen appliances, TVs, and pieces of outdoor furniture, back rooms and warehouses that could be otherwise carrying food or personal care items end up getting crowded out. The choice: hold onto those bulky items, or sell them at a discount to make space.

“We chose the latter, leading to incremental markdowns that reduced our gross margin,” Cornell said, adding that those were “difficult decisions.”

The retail industry’s bigger problem? This is not a Target-specific story.

Walmart (WMT), which reported its own clunker of a quarter on Tuesday, said it needs another couple of quarters to “work through and sell through” excess inventory.

Other retail stocks, like Dollar Tree, Dollar General, Dick’s Sporting Goods, and Costco, among others, fell sharply on Wednesday despite no earnings reports of their own, underscoring investor fears about the macroeconomic trends that could potentially weigh on their results in the coming quarters.

The issue facing the industry is partly an echo of the pandemic, as big box retailers actively worked to expand inventory during 2021 as shuttered factories and materials shortages — and the Ever Given — led to empty shelves. Big box retailers resolved to avoid these those issues by expediting orders when available, and ordering more quantities upfront in advance of the 2022 season.

Turns out some of that may have been too much.

To be fair, forecasting inventory (or anything at all) in the midst of a global pandemic is an enormously difficult task. Add a war in Eastern Europe and that task gets a lot harder.

The upside for consumers is that this may result in some deals as retailers scramble to get inventory out of their backrooms, as American Apparel & Footwear Association President and CEO Stephen Lamar told Yahoo Finance Live on Wednesday.

But potential sales for consumers tomorrow offer little consolation for investors today.

What to watch today

Economy

  • 8:30 a.m. ET: Philadelphia Fed Business Outlook Index, May (15.0 expected, 17.6 during prior month)

  • 8:30 a.m. ET: Initial jobless claims, week ended May 14 (200,000 expected, 203,000 during prior week)

  • 8:30 a.m. ET: Continuing claims, week ended May 7 (1.320 million expected, 1.343 during prior week)

  • 10:00 a.m. ET: Existing Home Sales, April (5.65 million expected, 5.77 million during prior month)

  • 10:00 a.m. ET: Existing Home Sales, month-over-month, April (-2.1% expected, -2.7% during prior month)

  • 10:00 a.m. ET: Leading Index, April (0.0% expected, 0.3% in during prior month)

Earnings

Pre-market

  • BJ’s Wholesale Club (BJ) is expected to report adjusted earnings of $0.71 per share on revenue of $4.22 billion

  • Kohl’s (KSS) is expected to report adjusted earnings of $0.71 per share on revenue of $3.71 billion

  • Eagle Materials (EXP) is expected to report adjusted earnings of $1.77 per share on revenue of $403.31 billion

Post-market

  • 4:00 p.m. ET: Ross Stores (ROST) is expected to report adjusted earnings of $1.00 per share on revenue of $4.54 billion

  • 4:05 p.m. ET: VF Corp (VFC) is expected to report adjusted earnings of $0.46 per share on revenue of $2.83 billion

  • Palo Alto Networks (PANW) is expected to report adjusted earnings of $1.68 per share on revenue of $1.36 billion

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