Can’t find the target?

Stocks staged a comeback from an early deficit as tech stocks led the way to gains. Target has analysts and economists sharpening their pencils for different reasons – clouds and silver linings.

Far off target. In this past earnings season, investors were somewhat caught off guard when Walmart and Target, both pandemic-era mainstays, lowered forward guidance and warned of challenges. That is just 1 part of a story that can have broader implications in the broader economy. Target offered the most telling insight. The mass retailers detailed how its customers were spending more on groceries (got-to-haves) at the expense of soft/hard goods (want-to-haves). In plain English, consumers, forced to pay more for food, have less to spend on video games, fashion items, and home décor. That had an impact on Target’s earnings, as food items have lower margins than those non-essential goods on the other side of the store. For Target, that means lower margins, which really means lower earnings at the end of the day.

Turn the clock forward… for like 3 weeks and Target has sent us another important message. Yesterday, the company announced that it was cutting its profit outlook. Why? Because it has too much inventory and it is going to have to lower prices to make room for fresh arrivals. Wait, what…and what? Too much inventory? Aren’t we in the middle of a supply crunch which has caused prices to skyrocket? And further, aren’t retailers raising prices? Regarding inventory, we heard from Target in their last earnings announcement that purchases of non-food items decelerated due to higher food costs, and now non-food inventory is building up on the racks with nowhere to go. Aside from higher costs of essential items like food and fuel, there is evidence that consumers are spending down all that great pandemic savings from lockdowns and stimulus checks, leaving less disposable income for those non-essential items. Target is so concerned with that inventory slack that it is going to slash prices in a time when consumers are expecting hikes. Additionally, the retailer is cancelling orders with its vendors to ease the buildup. Folks, that is not conjecture, it is fact, and the pain at Target must be quite acute for it to enact such draconian measures.

To widen our perspective, Target is not the only retailer experiencing a similar buildup of supply. Walmart experienced similar challenges in the past quarter, and it too has revealed that it has more inventory on hand than it would like. Going beyond mass merchants, department stores too may be feeling the crunch. Macy’s announced that it has experienced a decline in demand and that the “shift took place at a quicker pace than expected.” In April, the company’s inventory was up by +17% from a year ago, and it is weighing price cuts. Even more severe is a similar case affecting deep discounter Big Lots, which in its last earnings announcement reported that Q1 sales were lower by some -15% from a year earlier, and worse yet, its inventory rose by +49%. To be fair, some of these problems could be related to poor inventory management, but there is a clear pattern emerging – consumers are consuming less.

We all need to eat…some of us more than others, and according to the Department of Transportation, households on average, possess 1.88 vehicles which need gasoline…also, some more than others. Rising fuel and food costs are beginning to impact how we spend our money. The initial impact may provide some relief at the mall, but due to the ongoing war in Ukraine and continued high transportation costs, food and fuel inflation may not ease up anytime soon. The now infamous US President Herbert Hoover once famously called for a “chicken in every pot and a car in every backyard.” That call was made in 1928 and it likely seemed laughable a year later when the country sank into The Great Depression. Though Hoover’s dream may have ultimately become a reality almost a century later, he would likely be shocked at just how much it would cost to fill a dinner pail and a gasoline tank in 2022. No, the high cost of living these days does not appear to be going away just yet, but there are some signs that basic economics is begging to bring things back into equilibrium. Stay tuned…and enjoy those discounts.

YESTERDAY’S MARKETS

Stocks gained ground yesterday, erasing earlier losses, as investors cautiously attempted to buy deeply discounted tech shares. The S&P500 rose by +0.95%, the Dow Jones Industrial Average climbed by +0.80%, the Nasdaq Composite Index gained +0.94%, and the Russell 2000 Index advanced by +1.57%. Bonds climbed and 10-year Treasury Note yields pulled back by -6 basis points to 2.97%. Cryptos lost -0.80% and Bitcoin declined by -0.34%.

NXT UP

• Wholesale Inventories (April) may have increased by +2.1% for the month, in line with prior estimates.
• US Crude Inventories (June 3) are expected to have declined by -2.328 million barrels after falling by -5.608 million barrels in the prior week.