Target and Walmart earnings have some ‘common patterns,’ analyst says

Jefferies Managing Director of Consumer Research Steph Wissink joins Yahoo Finance Live to discuss first-quarter earnings for Target, consumer demand, inflation, and the outlook for growth.

Video Transcript

JULIE HYMAN: And as we were just talking about, a rare miss at Target and how. The retailer disappointing on earnings this morning, the shares plunging by 25%. And Target citing what it says were unexpectedly high costs that hit profitability. It is set to raise prices for consumers, to some degree. Let's dive into these earnings with Steph Wissink, Jefferies managing director of consumer research. Steph, it's great to see you to help us sort of make sense of this report on top of Walmart yesterday. What's your takeaway here? How painful is this going to be for Target, for how long?

STEPHANIE WISSINK: Yeah, it's great to see you as well. And I am sorry I'm not bringing better news. It has been a wild 48 hours in retail. We heard from Walmart yesterday, Target today. And I think one of the things that really stood out to us was just the common patterns. We're seeing both companies are signaling that their stores are seeing stronger traffic versus ecom. Both companies are seeing higher costs to execute their business. Consumers are reshaping their behavior, so moving more towards essentials versus discretion.

And I think the last thing is just that this is not going to abate any time soon. I think there were a lot of conversations among investors that maybe inflation for the consumer has peaked. But these two companies are giving us very different signals that we're still seeing costs rising faster than prices and more pricing is to come. So for Target specifically, and I think Walmart saw the same thing, when they're placing orders six months in advance, they're looking at very different consumer conditions in the back half of last year.

Pretty strong consumer with stimulus. Now that consumer is making some very distinct changes in their behavior, and that is affecting these discretionary categories. So a lot of excess inventory, and I would throw Amazon in there, too. When you look at inventory levels across these big three power retailers, very, very high relative to current sales patterns. So we are going to see some inventory release. And that's going to come through markdowns and discounts. And I think it was interesting, as you pointed out, TJ Maxx looking strong today. They are going to be a buyer of some of this dislocated inventory.

BRIAN SOZZI: Steph, Brian here. This was-- I mean, these are brutal calls. And now today, we didn't see the moves yesterday. I think folks are waiting to get these Target results. But look, Best Buy shares right now getting slaughtered. Costco, slaughtered. Dollar General, slaughtered. Dollar Tree under pressure. Is it reasonable to expect all of these companies to post very bad earnings reports of their own, just based on what we have heard from Walmart and Target?

STEPHANIE WISSINK: Yeah, I don't know that we're seeing at this point that it's universal. I think we are seeing some elements of execution and pressure that's unique. But I would say even in consumer survey work that we're doing, the club channel, the dollar channels are seeing higher traffic and higher volumes. That was probably the one bright spot in Walmart's report yesterday. The Sam's Club numbers looked fantastic. So there might be some consumer rotation.

The other thing I would point out is that consumers are getting back to living versus just buying goods. And we even heard that from Target today. Categories like luggage are up 50% plus. So we're also seeing signals that the consumer, particularly the upper end consumer, is pivoting from buying goods to more services. So we might-- we may be observing things kind of real-time in terms of the inflation burden, but also this pivot at the same time.

And I think that might be somewhat of the reason we're going to see a very different and pronounced outcome across different subsectors of consumer. But certainly, goods heavy, discretionary heavy, and low end, in the case of Walmart, those behavioral shifts are happening faster than anybody expected. And that's playing out in how the gross margins are being reported and the near-term burden of inventory digest.

BRAD SMITH: So marrying those two together on the shift from goods to services, which is cyclical, and going into some of the travel seasons, and then, additionally, on the number of inventories that all of these companies have reported at this point in time and the discounting that we're expecting to go forward, all of that considered, how long do you expect this to be a compression factor on their margins going forward?

STEPHANIE WISSINK: Yeah, I think the more aggressive, the shorter, but the more painful in the near term. But I also think-- and we heard this both from Target and Walmart and even through text with Amazon-- the buyers are making cuts to the back half order books. So this is affecting the way the orders are being structured for the second half. And it should. If the consumer is showing a pivot and the consumer is showing some sensitivity in terms of inflation in some of these discretionary categories, it makes sense to pull back on future orders.

So I think you're not only going to see a near-term immediate effect from markdowns to try to digest through what they own, but also turning off the faucet a little bit, and not bringing in so much inventory into some of these categories that seem the most vulnerable.

BRIAN SOZZI: To you, Steph, did these reports from Walmart and Target-- I'll leave TJ Maxx out, but from Walmart and Target, did they have recessionary vibes to them, in your view? And then secondarily, both stocks have had big moves off of these reports. Has the market already priced in a recession into shares of Walmart and Target?

STEPHANIE WISSINK: Yeah, I'm not an economist, so I'm not going to call a recession, but I do think we're seeing indications of receding. And receding is a movement in the consumer behavior that would suggest a change. And how pronounced and how long that lasts, it's hard to say. I mean, stimulus clearly last year was a nice booster effect, so we're lapping some of that. So it's hard to distinguish how much is underlying consumer health, which the economists would say the consumer is still extremely healthy, versus how much consumer confidence is bearing negatively on actions.

So I think we're still in the diagnostic side of what a recession might look like versus we are in a recession. We are seeing receding. And there's no doubt about it when you see the big three, Walmart, Target, and Amazon, all making very similar comments about consumer demand and consumption patterns. We need to take that as a common pattern and acknowledge that it's probably a pretty clear signal.

JULIE HYMAN: Steph, how much are we going to see bifurcation once again going forward? I mean, during the very stimulative time in the economy in 2020 and 2021, when people were getting checks, we were seeing a lot of spending across the board in the economy, do these results help show that maybe going forward, some of the higher end retailers are going to outperform? Maybe the lowest end retailers maybe will be OK, but we're going to see a broad swath in the middle that's going to struggle?

STEPHANIE WISSINK: Yeah, it's so-- it's an interesting observation because this is exactly what's showing in our consumer survey work. Upper end is shifting, pivoting, from goods to services, getting back to living and travel and leisure and socialization, including big events like weddings and gatherings. And the low end is still slightly advantaged in terms of wage growth versus pricing growth, but as we've heard from all of these retailers, not all of the pricing is yet being seen in consumer prices yet. So that consumer is on paper richer, but not maybe feeling quite as rich as they did six months ago.

The middle is where the purchasing power is compressing the fastest, where wage growth has not kept up with pricing growth and where they maybe last year, based on stimulus, looked a little bit more like a high end consumer in terms of discretionary spending. But now we're shifting down and behaving more like a moderate to low income consumer, thinking about that week to week traffic and trip building. And that's very different. So when that middle move, that's where you see the biggest points of pressure on the overall consumer index. That's the largest portion of the population, has the most bearing on consumer confidence measures, and is the swing factor consumer.