Earnings reports from Walmart, Target and Amazon this month showed that higher costs are hurting retailers’ operations. While profits for all companies in the benchmark S&P 500 rose about 9% last quarter, retail profits fell more than 30% from a year ago. They blamed rising raw material, transport and labor costs on the crisis.
The weak results surprised investors who were watching the sector closely to see the impact of inflation on various businesses. Companies had already raised the prices of goods to offset rising costs and increase profit margins. Consumer spending remained resilient throughout 2021, despite rising costs. But after Russia’s invasion of Ukraine sent energy prices skyrocketing, companies found it harder to offset the costs.
Consumers also shifted their spending away from high-priced discretionary items towards necessary goods, or simply fell back as higher food and gasoline prices absorbed more of their income.
“The consumer suddenly seemed a lot more vulnerable” last quarter, said Brad McMillan, chief investment officer for Commonwealth Financial Network. Other trends, such as declining consumer confidence and real incomes, are also in the red. “As the consumer goes, so goes the economy and ultimately the market.”
Target’s profit fell 52% from a year ago as costs piled up. Walmart, the nation’s largest retailer, also posted weak profits. Both chains revealed that consumer spending is changing, with Walmart executives pointing to a shift to private label from national brands, particularly in lunch meats.
Inflation is at its highest level in four decades and the US economy contracted in the first three months of the year, the first decline in gross domestic product since the pandemic hit. The latest retail trade reports have raised concerns of more weakness to come this year.
Retailers’ troubles are also ringing alarm bells for other sectors of the economy.
The slow post-pandemic labor market recovery over the past two years has left another 1.2 million jobs below pre-pandemic levels. The retail sector’s recent weight in the broader market could then trickle down to overall hiring as employers seek to control costs, said Comerica Bank chief economist Bill Adams.
Meanwhile, on Wall Street, the S&P 500 fell to its lowest level in more than a year, and disappointing retail earnings nearly dragged it into a bear market, 20% below its recent peak.
“The stock market sell-off could dampen business sentiment and make some companies more cautious about hiring, especially companies that have negative cash flow and rely on investor money to fund operations like many startups. “, said Adams.