Retail Stocks Crushed as Target (TGT) and Walmart (WMT) Reports Showed 'Dramatic' Margin Pressure; TJX (TJX) Up 10% on Stronger Margin Performance Than Peers

May 18, 2022 10:13 AM EDT
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Retail stocks are getting battered today in response to “problematic” earnings reports released by Target (NYSE: TGT) today and Walmart (NYSE: WMT) yesterday.

Both companies reported elevated costs and higher inventories that dragged on profits and margins. Some analysts highlighted that WMT’s and TGT’s reports show that the low-end consumer is under significant pressure.

Target shares were further hit by commentary on the earnings call that with the company’s COO calling for $1 billion in incremental freight costs this year.

Truist analyst Scot Ciccarelli downgraded TGT stock to Hold to reflect “materially” lower margins while “mix/markdown issues now seem likely to linger.”

Target’s outlook cut is so dramatic that Walmart’s guide down “loos more tame in comparison,” writes Morgan Stanley’s Simeon Gutman.

“While TGT’s results aren’t ‘good’ for WMT, they do answer the question of whether WMT’s challenges in Q1 were idiosyncratic or representative of broader operational headwinds in retail; clearly it’s the latter,” Gutman told clients in a note.

For Evercore ISI analyst Greg Melich the main risk “has been the sustainability of margins of 8% or higher as the US retail environment normalizes in a post Covid world.”

Given the overall theme in the retail reporting so far this earnings season, the broader sector is under significant pressure.

Williams-Sonoma (NYSE: WSM) stock is down 9.3% today, Best Buy (NYSE: BBY) 8.4%, Costco (NYSE: COST) 8.8%, Dollar General (NYSE: DG) 12%, Dicks (NYSE: DKS) 11.8%, Bed Bath & Beyond (NASDAQ: BBBY) 6%, with Kroger (NYSE: KR) shares down 4.1%.

Moreover, Kohl's (NYSE: KSS) shares are trading 8.3% lower, Macy’s (NYSE: M) 8.1%, Five Below (NASDAQ: FIVE) 9.1%, Nordstrom (NYSE: JWN) 6.7%, Tractor Supply (NASDAQ: TSCO) 9.8%, while Dollar Tree (NYSE: DLTR) shares are down as much as 16%.

On the other hand, TJX (NYSE: TJX) is up 10% today as investors are rewarding the company for its stronger margin performance in comparison to Target and Walmart.

TJX raised its adjusted pretax margin outlook for the full year to 9.6% to 9.8%. In the first quarter, the gross profit margin came in at 27.9% to top the estimated 27.5%.

“While [TJX] sales came in a bit light of expectations to start the year, TJX more than offset the shortfall with stronger margin performance, which we see as an encouraging sign given the challenging global operational environment,” Telsey analyst Dana Telsey said in a client note.

“Overall, we view this morning’s release as evidence of the company’s ability to successfully navigate through a challenging environment, utilizing its flexible retail pricing strategy to offset macro pressures to continue to deliver strong profitability.”

By Senad Karaahmetovic

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