Major Retailers Sound Inflation Alarm as High Prices Hit Profits

By Tom Ozimek
Tom Ozimek
Tom Ozimek
Tom Ozimek has a broad background in journalism, deposit insurance, marketing and communications, and adult education. The best writing advice he's ever heard is from Roy Peter Clark: 'Hit your target' and 'leave the best for last.'
May 21, 2022 Updated: May 22, 2022

A number of major retailers missed Wall Street expectations by wide margins last week, while the vast majority of the nearly 150 U.S. retailers that have reported first-quarter earnings so far have explicitly mentioned inflation, as surging prices have squeezed bottom lines.

Refinitiv data show that, of the 145 retailers that have reported first-quarter earnings so far, 138 flagged supply chain issues and 127 mentioned inflation.

Walmart, Target, and Kohl’s were among the biggest retailers to report earnings last week that came in well below Wall Street forecasts, highlighting the impact that the highest rate of inflation in 40 years was having on consumer sentiment and corporate profits.

Consumer confidence fell in May to its lowest level since 2013, according to the latest data from the University of Michigan’s survey of consumer sentiment.

Joanne Hsu, survey director, said inflation was at the forefront of consumers’ thoughts, with respondents mentioning it throughout the survey.

“Consumers’ assessment of their current financial situation relative to a year ago is at its lowest reading since 2013, with 36 percent of consumers attributing their negative assessment to inflation,” Hsu said. “Buying conditions for durables reached its lowest reading since the question began appearing on the monthly surveys in 1978, again primarily due to high prices.”

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Grocery shopping in Rosemead, Calif., on April 21, 2022. (Frederic J. Brown/AFP via Getty Images)

Worries about surging inflation and rising interest rates have hammered U.S. stocks this year, with the benchmark S&P 500 and the Nasdaq logging their seventh straight week of losses last week, their longest losing streak since the dot-com bubble burst roughly two decades ago.

Danger signals from Walmart and other retailers last week have added to fears about the economy.

Walmart Chief Financial Officer Brett Biggs said during the company’s earnings call that customers were opting for cheaper alternatives and avoiding costly purchases entirely.

“The first quarter was one of the most challenging periods yet related to supply chain disruptions, increased costs, and persistently high inflation,” Biggs said. “We weren’t able to fully address or pass along some of the cost increases, and that impacted profit more than expected.”

Walmart posted a quarterly profit that fell by 25 percent, the nation’s largest retailer’s first miss in five quarters.

A Walmart store in East Setauket, N.Y., on March 16, 2020. (Bruce Bennett/Getty Images)

While Target posted strong first-quarter sales, the retailer saw its profits shrink by 52 percent.

Target CEO Brian Cornell said on an earnings call that the company faced unexpectedly high costs throughout the quarter, which have risen faster than retail prices.

While Cornell cited “encouraging” longer-term growth trends that show “the continued resilience of the American consumer,” he said customers worry about the impact of high prices on their purchasing power.

“Not surprising, when we talk to our guests, they often express their concerns about a host of rapidly changing conditions, ranging from geopolitics to the high and persistent inflation they’ve been experiencing, particularly in food and energy,” he said.

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Signage at a Target store in New York on Nov. 22, 2021. (Andrew Kelly/Reuters)

Nominal wages, which aren’t adjusted for inflation, climbed by 5.5 percent in the year through April, government data show. But the faster 8.3-percent pace of consumer price growth within the same period means that inflation-adjusted real wages actually declined by 2.8 percent, effectively giving many U.S. households a pay cut.

Department store chain Kohl’s cited soaring inflation in posting a 92 percent drop in adjusted profit.

Kohl’s CEO Michelle Gass blamed higher freight and wage costs, as well as reduced clothing demand, for the shortfall.

“This is a little bit of a retail apocalypse. It was Walmart [on May 17] and everybody thought it was a one-off,” Dennis Dick, a trader at Las Vegas-based Bright Trading, told Reuters. “Now that Target missed earnings [by] a lot more than Walmart even did, they’re scared that the consumer is not as strong as everybody thinks.”

Consumer spending is a major driver of the U.S. economy, accounting for around two-thirds of gross domestic product.

Reuters contributed to this report.

Tom Ozimek
Tom Ozimek has a broad background in journalism, deposit insurance, marketing and communications, and adult education. The best writing advice he's ever heard is from Roy Peter Clark: 'Hit your target' and 'leave the best for last.'