Earnings reports from the nation’s largest retailers for the first quarter recently spooked Wall Street into a broad collapse. Executives of major chains blamed lower profits and margins on a sudden, “unexpected” shift in consumer spending behavior — from merchandise to experiences, like travel and dining.
Analysts who follow the industry declared their disappointment and reduced their investment ratings.
The five-day swoon in share prices that followed drained industry balance sheets by a total of about half a trillion dollars in equity.
A Bloomberg headline shrieked, “More Horrors Await.” Reuters dubbed it a “Retail Apocalypse.”
But no one should have been shocked. The glut of inventory that retailers are choking on now was predictable — in fact, it was predicted.
In December, in this column, we warned about the whipsaw effect of the tangled supply chain. Even before the holiday season was finished, it was clear that late-arriving cargos were going to fill retailers’ warehouses with goods that were out of season and, as it turns out, out of step.
That’s precisely what happened.
Target reported its inventories ballooned 43% in the first quarter as merchandise like televisions and kitchen appliances piled up. Walmart said its inventories rose 32%.
One analyst quoted in the Reuters story claimed Wall Street was "angry" at Walmart and Target over the rosy outlook for 2022 that the companies presented in March.
But as early as the beginning of February, the US Commerce Department was reporting that the percentage of consumer spending that was on goods had fallen for the second month in a row, while spending on services had increased.
The Wall Street Journal reported this trend under the unambiguous headline, “Consumers Are Pivoting Spending to Services Like Dining and Travel.” James Knightley, the chief international economist at ING, told the Journal that consumers started 2022 with a “general fatigue of buying physical things.”
So earnings disappointments shouldn’t have been much of a shock to anyone who was paying attention. As we warned in December, “The next quarter or two is likely to see heavy discounting.”
The meltdown was a notable event, but hardly an apocalypse. While inflation and higher labor costs took a bite out of margins, Walmart said its comparable sales grew 3%. Target’s comps grew 3.3% in the quarter, on top of 23% growth in the same quarter a year ago. Target sales have risen now for 20 quarters in a row.
What happened in the first quarter was what so often happens in the retail industry when merchandise buyers are out of sync with consumers.
Yes, the pandemic, supply chain snafus, and Russia’s invasion of Ukraine have all been unpredictable events that have buffeted the retail industry.
Even so, the retail industry has a ways to go to adopt the kind of real-time tracking and research that is available today to steer companies away from mistakes and be able to serve up fewer surprises for Wall Street.