Target, Walmart Selloff Spotlights Retail’s Inflation Pains Higher costs on fuel, products and wages prompt some companies to rethink how and when to raise prices further
Investors dumped shares of Walmart Inc., WMT -6.79%▼ Target Corp. TGT -24.93%▼ and other big chains—notching some of the biggest declines since the market crash of 1987—amid fears that the companies wouldn’t be able to pass along higher prices to consumers. It has also stoked concerns through financial markets about the resilience of companies that collectively employ millions of workers in the U.S. and abroad. (…)
The selloff, which began earlier this year with highflying tech companies such as Nvidia Corp. NVDA -6.82%▼ and Meta Platforms Inc., now has investors wrestling with the idea that the economy could be headed for a recession. Federal Reserve Chairman Jerome Powell said Tuesday that the central bank’s resolve in fighting inflation shouldn’t be questioned, even if it requires pushing up unemployment. (…)
Target shares tumbled 25% after the retailer posted weaker-than-expected quarterly earnings and said it would rather absorb higher costs than raise prices on shoppers. Target management said fuel and freight costs will be $1 billion higher this year than it had expected, with little sign of their easing this year.
“While we don’t like the impact to our profitability in the short term, we know it is the right thing to do for our guests and our business over the long term,” said Target Chief Financial Officer Michael Fiddelke on an earnings call Wednesday.
Walmart said Tuesday that higher product, supply-chain and employee costs ate into its profit in the latest quarter, a result that Chief Executive Doug McMillon described as disappointing. The country’s largest retailer by revenue said that while it generally passed along price increases from suppliers to consumers, inflation in fuel costs came faster than it expected and that it would continue working to keep prices on groceries low. After Walmart’s stock shed more than 11% after its earnings report, shares retreated an additional 6.8% Wednesday. (…)
Americans continued to spend briskly in April on products as diverse as cars and clothing, which economists and company executives say is a sign that consumer spending is relatively healthy. But consumers are also showing signs they are less willing to absorb price increases and are trading down to less-expensive items, according to retailers and manufacturers. (…)
“We did not anticipate the rapid shifts we’ve seen over the last 60 days,” Target CEO Brian Cornell said about elevated transportation and freight costs on an earnings call Wednesday.
Mr. Cornell said customers were buying fewer big items—such as bicycles, TVs and kitchen products—than in the past two years. (…)
While the Target chief said the spending shift has been significant, shoppers are continuing to visit the retailer’s stores. The number of transactions rose nearly 4% in the April-ended quarter, the company said.
My narrative:
- High inflation is masking big volume declines. If WMT, TGT and AMZN report low single digit growth rates when inflation is high single or low double digits, you can be certain that real sales are way down.
- TGT saying traffic is up 4% while nominal comps are up 3.3%, it is saying many shoppers are just browsing.
- Retailers are stuck with excess inventory as ships are finally unloading and shipping right when customers are spent out. Competition is rising and pricing power has evaporated. WMT’s inventory jumped 33% in Q1. 33%! Comps are up 3%. This is the largest retailer in the U.S..
- Investors are finally learning that inflation has real life impact on purchasing power, costs and margins.
- They will soon learn the ripple effects of excess retail inventory. Retailers will cut/cancel orders and trim costs, labor first.
- Recession fears will grow.
BTW: U.S. total business inventories (manufacturing, wholesalers, and retailers) expanded 2.0% in March, which comes on top of an upwardly revised 1.8% increase in February (previously +1.5%). This marks the third fastest monthly tally on record. In fact, the pace of inventory accumulation has exceeded that of sales in three of the past four months, allowing the overall inventory-to-sales ratio to rise to 1.28x, from 1.27x previously and 1.26x at the end of last year.
That was for March. It got worse in April.
In the recent PMI surveys, 61% of purchasing managers said that their customer inventories are too high. Double a year ago.
Goods consumption is slowing/declining fast, goods inflation will slow/decline fast. But core goods are only 21% of CPI. Stickier services inflation is taking over.
Can we have a goods recession without a full fledge recession? We are about to find out.
More Subprime Borrowers Are Missing Loan Payments Strained by the end of pandemic benefits, consumers with limited or troubled credit histories are falling behind on payments for car loans, personal loans and credit cards.
The share of subprime credit cards and personal loans that are at least 60 days late is rising faster than normal, according to credit-reporting firm Equifax Inc. In March, those delinquencies rose month over month for the eighth time in a row, nearing their prepandemic levels.
Delinquencies on subprime car loans and leases hit an all-time high in February, based on Equifax’s tracking that goes back to 2007. (…)
The jump in subprime delinquencies could reduce lenders’ willingness to make loans to riskier borrowers. (…)
Some 11% of general-purpose credit cards held by consumers with credit scores below 620 were at least 60 days behind on payment in March compared with 9.8% a year prior, according to the latest data available from Equifax. Personal loans and lines of credit delinquencies came in at 11.3%, up from 10.4% a year prior. Both categories hit Covid-19-era lows of 7.5% and 8.3%, respectively, in July.
Car loan and lease delinquencies hit a record in February, based on Equifax’s tracking, with 8.8% of subprime accounts behind on payment by at least 60 days. That edged down to 8.5% in March but was still the second highest level on record.
Fewer people are in subprime credit-score brackets than when the pandemic began. Some 18.6% of U.S. adults with credit scores had a score lower than 600 in 2020, compared with 15.5% last year, according to Fair Isaac Corp. , creator of FICO scores.
Lenders say that delinquencies are going up from artificially low levels and that their credit portfolios overall remain strong. Many refer to what is happening as a normalization, where delinquency rates return to levels more in line with prepandemic times. Some say their delinquencies remain below their first-quarter 2020 levels. (…)
That does not include the BNPL crowd…
U.S. Housing Starts Dip in April but Remain Elevated
Housing starts edged down by 0.2% (14.6% y/y) in April to 1.724 million units from 1.728 million in March. The March figure was revised down sharply from 1.793 million. The Action Economics Forecast Survey expected 1.765 million starts in April, which signaled that economists did not think the surprisingly high reported March figure would hold. The downward revision and slight decline recast the starts figures, suggesting they remained at an elevated range in April.
The pattern of housing construction activity seems to be shifting toward multifamily. Initially after the pandemic lockdowns, single-family starts and permits jumped, but have remained in a range for the past two years. Meanwhile, starts of multifamily dwellings, which are about half the size of single-family units, have been rising steadily. In April, starts of single-family units fell 7.3% (3.7% y/y) to 1.100 million following a dip to 1.187 in March. Multi-family housing starts jumped 15.3% (40.5% y/y) to 624,000 in April, which was a 26-year high.
By region, housing starts remain volatile and mixed. After skyrocketing in March, the Northeast gave back a third of that gain (23.2% m/m) in April to 182,000. Starts in the West rose 3.4% (11.6% y/y) to 432,000. Starts in the Midwest dropped by 22.0% (2.2% y/y) to 184,000 in April. In the South, housing starts increased 10.6% (18.4% y/y) to 926,000 units. The South is the only region showing a noticeable upward trend.
Building permits declined by 3.2% (3.1% y/y) to 1.819 million from 1.879 million in March. Permits to build single-family homes declined 4.5% (-3.7% y/y) in April to 1.110 million units. Permits to build multi-family edged down by 1.0% (15.6% y/y) to 709,000.
- Mortgage Lenders Are Playing Defense Even as rising rates lead to lower mortgage demand, some pricing power might emerge for originators, especially when it comes to home buying
- Toronto housing market ‘suddenly getting into buyers market terrain’: BMO chief economist
Canadian Inflation Hits New Three-Decade High of 6.8% on Housing
The average of core measures — often seen as a better indicator of underlying price pressures — rose to 4.23%, the highest since 1990. (…)
Shelter costs were a leading driver for price gains in April, while prices for gasoline declined slightly. Food costs also continue to rise quickly, gaining 8.8% on an annual basis as the war in Ukraine drives up the price of critical foodstuffs like wheat and farming inputs like fertilizer. Prices for food purchased from stores are up 9.7% from a year ago, the statistics agency said, the fastest gain since 1981.
There were some signs of easing pressure on a month-over-month basis, even as gains continue to be historically high. In April, prices rose 0.6%, versus expectations for a 0.5% gain, after a 1.4% gain in March.
The 6.8% annual reading, though, may not represent the peak of annual price gains, given that gasoline prices have picked up since last month, with some economists speculating inflation could top 7%.
There are also signs that imported inflation continues to spill over into domestic price gains, with the cost of services rising 4.6% from a year earlier, the fastest pace since 1991.
“The key takeaway from April’s CPI release is that inflation is spreading much more broadly, and at clear risk of getting firmly entrenched,” Porter said. (…)
- CPI +6.8% YoY in April, prior +6.7%
- CPI-Common +3.2%, prior +3.0%
- CPI-Trim +5.1%, prior +4.8%
- CPI-Median +4.4%, prior +4.0%
MoM: CPI: +0.7% after +1.0%
Core CPI: +0.5% after +0.7%
Shelter: +1.1%, most since 2006.
The increases in the average of the BoC-preferred core measures over the last two months have been the highest on record except for March 2011.
European Auto Sales Plunge 20% In April, Extending 10 Month Losing Streak
China Stops Reporting Bond Trades by Foreigners After Selloff
Stock Market Top-Heavy, Carnage Is Widespread As former highfliers including Microsoft, Apple and Amazon falter, broader market feels pain
Eight companies are to blame for nearly half the stock market’s decline this year—and the pain doesn’t end there.
Apple Inc., Microsoft Corp. , Amazon. com Inc., Tesla Inc. and the parent companies of Google and Facebook swelled to be so big in recent years that they accounted for 25% of the S&P 500 heading into 2022. (…)
Together with Nvidia Corp. and Netflix Inc. , they are responsible for 49.6% of the benchmark’s 2022 losses through Tuesday on a total-return basis, according to S&P Dow Jones Indices.
The S&P 500 has tumbled 18% in 2022, or 17% when accounting for dividends and stock distributions. The stock market’s former darlings have fallen even farther. Netflix has declined 71%, and Facebook parent Meta Platforms Inc. and Nvidia are down 43% and 42%, respectively. The other five stocks have dropped between 21% and 36%. (…)
The stocks supporting the S&P 500 this year have been Exxon Mobil Corp. , Chevron Corp. and ConocoPhillips, along with Merck & Co. and AbbVie Inc. , according to S&P Dow Jones Indices. The energy stocks have climbed more than 40% this year, while Merck has added 20% and AbbVie has climbed 13%. (…)
- Goldman Strategist Says Stocks Pricing Elevated Odds of Recession “A recession is not inevitable,” Goldman strategists led by David Kostin wrote in a note. “Rotations within the US equity market indicate that investors are pricing elevated odds of a downturn compared with the strength of recent economic data.”
As an example, Kostin cited the weakness in cyclical stocks compared with defensive sectors since January, which he said showed a 17 percentage points decline. “The relative performance of these two factors has closely tracked the level of the ISM index for more than a decade,” Kostin wrote. “The ISM currently stands at 55, but the relative performance of cyclicals versus defensives would imply a level below 50.” (…)
Comparing the S&P 500’s performance across 12 recessions since World War Two, Goldman’s Kostin said the US benchmark contracted from peak to trough by a median of 24%. A similar decline for the index from its January record high would bring it close to 3,650 points — nearly 7% below current levels — while the average decline of 30% would take it to 3,360, Kostin said. (…)
- JPMorgan’s Kolanovic Says Stocks ‘Can Climb Out of This Hole’ “There will be no recession this year, some summer increase in consumer activity on the back of reopening, China increasing monetary and fiscal measures.”
Bolstering his opinion is a conviction that US inflation has probably peaked, or is about to do so, paving the way for a pullback in price pressures that will eventually allow the Federal Reserve to moderate the pace of monetary tightening. Fed Chair Jerome Powell, in his most hawkish remarks to date, said Tuesday the US central bank will keep raising interest rates until there is “clear and convincing” evidence that inflation is in retreat. (…)
While Kolanovic and strategists like Kate Moore at BlackRock Inc. have suggested that concerns of an imminent recession are overblown, investors are piling into cash as stagflation worries mount, according to a recent Bank of America Corp. fund manager survey.
Kolanovic has maintained a bullish point of view even as stocks have tumbled. Just in the past couple of weeks, he’s advocated adding risk on peak hawkishness, and said markets are overpricing the odds of a recession. In mid-March he said market corrections were almost done, after in February saying bond traders were overpricing a hawkish Fed. (…)
Meanwhile, JPM’s economists are worried. GDP growth:
- 2022H2 is cut from 3.0% to 2.4%
- 2023H1 is cut from 2.1% to 1.5%
- 2023H2 is cut from 1.4% to 1.0%
Worst of Treasuries Rout Is Over For Now, JPMorgan Asset Says Fund sees close to even odds of a US recession next year.
Kohl’s becomes latest retailer to warn of inflation eating into profits “Sales considerably weakened in April as we encountered macro headwinds related to lapping last year’s stimulus and an inflationary consumer environment,” Kohl’s Chief Executive Officer Michelle Gass said.
The company’s net sales fell 5.2% to $3.47 billion in the first quarter ended April 30. Analysts had expected $3.68 billion, according to Refinitiv data.
On an adjusted basis, Kohl’s earnings fell about 90% to 11 cents per share in the reported quarter.