Retail is being impacted by the changing landscape we are seeing as consumers.
Massive retailers, like Target and Walmart, have missed on earnings over the last week. We can assume that if Target and Walmart have missed this quarter, so will smaller retailers.
However, this is something that has an explanation and like all else, this period they are in now, shall pass.
But let’s dive into it and answer the why and now what for retailers.
Both retailers had a similar sentiment that can be summed up in one sentence. Inflation, supply chain, and a changing consumer did not lend themselves well to having a good quarter.
Higher costs were cited by each company and were noted as having a material impact on their operations. With the increased costs of fuel costs due to inflation, labor costs due to wage inflation, and freight costs driven by fuel costs, each company is dealing with adapting their operations to account for these higher costs.
An additional issue is the supply chain constraints that both Walmart and Target are experiencing. Getting a steady and consistent flow of inventory of the products they carry has proven to be challenging for each company. They are holding excess inventory in some product categories and can’t keep other product categories at a comfortable level of inventory and supply. Supply chain issues are something that will resolve themselves over time as we have a normalized environment around Covid globally.
Finally, a changing consumer was noted as well. Both retailers are seeing that consumers aren’t spending as much on electronics and apparel, but are spending an increased amount on food. There are two factors at play here. For one, inflation may be pushing consumers to spend less on discretionary items like electronics and apparel and more on food. Secondly, consumers are turning to spending more on experiences like trips and restaurants as we haven’t been able to at normal levels for a while now. When spending in services is higher, typically we see the discretionary product spending decrease. This was the opposite in 2020 and some of 2021, where we saw spending on discretionary products significantly higher than the spending in the services sector.
In one sentence, retailers need to adapt and understand the cycles they are in. With inflation and more demand for services, they will see slightly less sales and revenue than previously projected as well as higher costs. Both noted this in their reports but are still expecting to grow year over year from a sales and revenue standpoint, just not as much as previously expected.
As retailers deal with the hurdles put in front of them after the first quarter, as investors, we will see these companies be a bit volatile because of the short-term uncertainty around costs, sales, revenue, and supply chain. But as inflation comes down and supply chain issues resolve, we will see retailers operating as normal. It will be interesting to see how retailers adapt during this time and if any of their operations change to be better prepared for the next time they are challenged with these issues.
Ultimately, we will obviously always need to buy things as consumers. Retailers like Target and Walmart have built out their online presence as well as maintaining their brick and mortar presence. We are in a transitional period for all retailers and the current hurdles just add to that. Depending on how you view it, this can be an exciting time as both a consumer and investor to see how these companies operate and better themselves moving into the future.