Why Walmart, Amazon and Other Big Retail Stocks Crashed Today

What happened

Shares of a wide range of retail stocks tumbled on Tuesday as a drop in one retailer’s forecast sent chills across the sector, sending fearful investors running for the exits. The catalyst that sent these retail stocks tumbling was a profit warning issued by walmart (NYSE: WMT)

Walmart was the biggest loser, dropping as much as 9.1%, Kohls (NYSE: KSS) the stock fell as much as 7.5%, Target (NYSE: TGT) was down 5.1%, and Amazon (NASDAQ: AMZN) down 4.8%. As of 1:25 a.m. ET, the quartet was still trading lower, down 7.5%, 7%, 4.9% and 4.6%, respectively.

So what

In a press release that dropped after the market closed Monday, Walmart revised its outlook for the second quarter and full year. The company said the changes were mainly the result of price cuts aimed at improving rising inventory levels.

Walmart now expects year-over-year net sales growth of about 7.5% in the second quarter, while operating profit is expected to fall between 13% and 14%. This will cause adjusted earnings per share (EPS) to fall between 8% and 9%. To put these numbers into context, management previously guided net sales growth 5%, while EPS was expected to be stable or slightly higher.

The company released similarly bleak forecasts for the rest of the year. Walmart now forecasts a 4.5% or 5.5% increase in sales for the year as a whole (excluding the sale of its Japan and UK businesses last year). He expects a hit to earnings, with EPS down 10% to 12%, excluding divestments. Walmart previously guided net sales growth of 4.5% to 5% (excluding divestitures) and essentially flat EPS.

The forecast cut was also accompanied by a wave of price target cuts by Wall Street analysts. DA Davidson analyst Michael Baker lowered his price target on Walmart shares to $148 from $162, though he maintained his buy rating on the stock. This represents an increase of about 12% for investors, compared to the closing price on Monday. While Baker maintains a positive long-term outlook for Walmart, he expected the business to hold up better given its product line, which includes fewer discretionary items.

Truist analyst Scot Ciccarelli lowered his price target on Walmart shares to $117 from $139, while maintaining a holding rating on the stock. This suggests that the shares could fall another 11% from Monday’s closing price.

While he views Walmart’s overall sales trends as solid, Ciccarelli is troubled by the changing sales mix and accelerating markdowns in some categories, including apparel, to eliminate excess inventory. The analyst suggests that low-to-middle-income consumers are feeling the bite of inflation, which is having a bigger impact on buying behavior than previously thought.

Now what

As the largest brick-and-mortar retailer in the United States, Walmart is considered a bellwether for the overall economy. If consumer buying behavior at Walmart is indicative of that at other retailers, this could be the canary in the coal mine for the retail industry, although we’ve had signs of tough times before. come.

After reporting disappointing first-quarter results in May, Target announced plans to shift its strategy to better adjust to current economic headwinds and “a rapidly changing environment.” This includes “additional markdowns, removal of excess inventory and cancellation of orders”.

Following these adjustments, Target expects full-year revenue to grow in the low to mid-single digit range. The company also expects an operating margin of around 6% in the second half of the year, beating Target’s “average fall season performance in the years leading up to the pandemic.”

Kohl’s had an equally difficult first quarter and was trying to adjust its strategy. The retailer said it plans to open smaller format stores in new markets, revamp existing locations and improve its omnichannel capabilities.

Management noted that in 2021, 99% of its 1,165 stores were cash flow positive and 80% of Americans lived within 15 miles of a Kohl’s location. By entering new markets, the company hopes to expand its existing footprint and build on its success.

Amazon also struggled in the first quarter, suggesting that the slowdown in e-commerce growth has continued. The company planned to focus on “improving productivity and profitability throughout [its] distribution network.” Then, earlier this month, the online retailer announced that its just-concluded Prime Day was the biggest ever.

While the company doesn’t release specific sales figures, it did say shoppers were stocking up on discounted items, leading to “record” sales. It remains to be seen whether this translates into improved financial results.

With inflation at its highest level in 40 years, consumers have increasingly difficult purchasing decisions to make. The success or failure of these mid-year shifts will help determine whether these retail stocks rebound or need to fall further.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Danny Vena holds positions at Amazon. The Motley Fool holds positions and endorses Amazon, Target, and Walmart Inc. The Motley Fool has a Disclosure Policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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