Shares of major U.S. retailers saw volatility this week as investors absorbed earnings reports that pointed to a lackluster outlook for the holiday season.
As of market close on Nov. 17, Walmart Inc.'s shares were up 2.3% year-to-date after surprising Wall Street with a large profit beat. Meanwhile, Target Corp.'s shares have plummeted 30% year-to-date after the retailer reported a profit miss in the third quarter.
Both companies offered underwhelming holiday season forecasts. Walmart's better-than-expected earnings were buoyed by higher-income shoppers who sought deals on groceries and other essentials. But the company still expects adjusted EPS to decrease up to 5% in the fourth quarter. Target, which lagged behind Walmart largely due to its reliance on sales from discretionary categories, also offered weak guidance for the holiday season.
U.S. e-commerce leader Amazon.com Inc., which warned of weak fourth-quarter holiday sales and is cutting up to 10,000 employees, has seen its shares tumble 43.1% year-to-date. Shopify Inc., which reported a net loss in its third quarter, has seen its stock drop 72.6%.
Zain Akbari, a Morningstar analyst who covers Walmart and Target, said Walmart's stock has always been seen as a steady "safe haven" as its shares performed well during the pandemic. The stock is expected to continue outperforming the market due to Walmart's focus on value-oriented deals and essentials.
Target had become the "darling of Wall Street" during the pandemic as its stock appreciated strongly and the company's omnichannel investments began to bear fruit.
"There were a lot of skeptics about Target, even prior to the pandemic," Akbari said. "The company's success during that phase, when things shifted so sharply to e-commerce, really forced people to reassess what they thought about Target. They were able to handle the surge in omnichannel retail without too much trouble."
Weaker holiday season
The retail stock volatility comes amid expectations that the holiday season will be weaker this year. The National Retail Federation expects the pace of U.S. holiday sales to slow year over year to a growth rate of 6%-8% over 2021 compared with a 13.5% pace over 2020.
U.S. consumers have become increasingly cautious, reflecting ongoing drags from elevated inflation combined with higher interest rates, said Gregory Daco, chief economist for Ernst & Young LLP. They are also turning to other avenues to finance their outlays, including credit cards and savings, neither of which are sustainable ways to continue spending, he said.
Meanwhile, retailers are facing the significant headwind of elevated labor and capital costs as well as much less pricing power, Daco said.
While companies are not cutting prices across the board, they are devoting much more attention to protecting market share and using more discretion on the pricing front. "You are seeing more deals being offered, more discounting," he said.
Consumers are now trading down to things that they need rather than things they want as they increasingly face inflation and recession worries, said Callie Cox, U.S. investment analyst for eToro. Meanwhile, companies are reviewing wage and inventory costs while watching consumer behavior on the demand side.
"It's a really tough environment for retailers, and I think you can see that reflected in their stock prices," Cox said.
The good news for consumers: Black Friday, the traditional day-after-Thanksgiving kickoff to the holiday shopping season, should be flush with deals for shoppers as retailers look to get rid of a large buildup of inventory, Cox said.
"The way that you do that is cut prices," Cox said.