Big box earnings results marred by inventory issues
Why it matters: People aren't spending the same way they were during the pandemic, David Silverman, a senior director at Fitch Ratings, tells Axios.
- "What we're seeing now are consumers shifting spending back toward consumer services," like entertainment, hospitality and travel.
Catch up fast: Retail sales are up 10% year over year, per the Commerce Department — and though inflation accounts for the increase, the numbers support consumer health, Silverman says.
- Earnings results are more tied to consumer behavior or spending preferences rather than inflation or consumer health concerns, he adds.
Zoom in: Target, which sells more discretionary goods than Walmart, took an aggressive approach to purge excess inventory resulting in an 87% decline in operating profit and a nearly 90% decline in net income.
- While its "rip the band-aid off" approach inflicts some Q2 reporting pain, Target will be better positioned for the remainder of the year, Silverman says.
- The retailer plans to significantly reduce inventory buys for the rest of this year.
- Both revenue growth and comparable sales at Target remained positive at 3.3% and 2.6%, respectively.
Meanwhile, Walmart beat earnings expectations, but its strong numbers were partially buoyed by the fact that much of its sales come from grocery, which has limited inventory and thus less markdown risk.
- While Walmart reported better-than-expected results, during its Q2 earnings call CFO John Rainey said the company canceled billions of dollars in orders to deal with inventory pileups.
By the numbers: Here's how other major retailers that reported this week fared:
- Home Depot's revenue increased 6.5% to $43.8 billion, comparable sales were up 5.4% in the U.S. and net earnings grew 7.6% to nearly $5.2 billion.
- Lowe's revenue declined less than a percent to $27.5 billion, while comparable sales increased 0.2% in the U.S. and net earnings were flat at about $3 billion.
- Kohl's revenue fell 8.5% to nearly $4.1 billion, while comparable sales declined 7.7% and net income plummeted 63% to $143 million.
Be smart: The inventory issue shouldn't be a surprise to the markets, as Walmart and Target began to make noise around the issue in Q1, Silverman says.
- Strong management teams, operations and financial flexibility position both to weather the storm well, he says.
- For struggling retailers with too much working capital tied up in inventory, there are negative cash flow implications — see Bed Bath & Beyond.
What we're watching: We're still early on in the earnings cycle and will have more context over the next week as more discretionary retailers report results.
The bottom line: This earnings season is about resetting unrealistic market expectations, Silverman says.