Retail stocks have taken a beating, but inflation, supply chain woes, and other cost concerns don’t tell the full story.
Retail stocks have seen huge price drops because pretty much every retailer has issued a cautious guidance due to supply chain issues and increased costs. Retailers including Walmart (WMT) – Get Walmart Inc. Report, Target (TGT) – Get Target Corporation Report, Amazon (AMZN) – Get Amazon.com Inc. Report, and Costco (COST) – Get Costco Wholesale Corporation Report have all seen their share prices fall.
Target shares, for example, are down almost 40% year-to-date with most of the drop happening after the company reported its first-quarter earnings. CEO Brian Cornell commented on how his company performed in a press release.
“Guests continue to depend on for our broad and affordable product assortment, as reflected in Q1 guest traffic growth of nearly 4%. Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time,” he said.
The company also revised its 2022 forecast lowering its expected operating margin rate from 8%, when it reported Q4 results to an “operating income margin rate will be in a wide range centered around first quarter’s operating margin rate of 5.3 percent.”
That’s a fairly modest change given the uncertain market, but investors did not like that news.
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Target’s Forecast Is Similar to Its Rivals
Amazon stock has also fallen in 2022, dropping by about 37% year-to-date. That’s not because the company has lost market share or seen its customer base go elsewhere, but because it’s honest in telling investors that it won’t be as profitable given current market conditions.
CEO Andy Jassy noted that the unique market conditions have caused the company to have higher expenses in his remarks in Amazon’s first-quarter earnings release.
Our Consumer business has grown 23% annually over the past two years, with extraordinary growth in 2020 of 39% year-over-year that necessitated doubling the size of our fulfillment network that we’d built over Amazon’s first 25 years—and doing so in just 24 months. Today, as we’re no longer chasing physical or staffing capacity, our teams are squarely focused on improving productivity and cost efficiencies throughout our fulfillment network. We know how to do this and have done it before. This may take some time, particularly as we work through ongoing inflationary and supply chain pressures, but we see encouraging progress on a number of customer experience dimensions, including delivery speed performance as we’re now approaching levels not seen since the months immediately preceding the pandemic in early 2020.”
Basically, it costs money to grow your customer base and your capacity and those expenses were consolidated into a very short period. Amazon, it should be noted, has always been willing to make an accelerated investment in its future at the expense of short-term profits.
Doing that may create uneven results, but it allows the company to make more money down the line. Amazon’s CEOs, be it Jassy or founder Jeff Bezos, have never managed for the quarter, Instead, they make the right decision for long-term growth and that’s actually a positive for investors.
Walmart has also invested heavily in building out its supply chain in recent years, although not quite as aggressively as Amazon. Costco has not had to do that as it can more evolve its supply chain because its business has largely been driven by members visiting its warehouses.
Costco has, however, grown its membership base and improved on its already excellent member retention rate.
Amazon, Walmart, Target, Costco Positioned to be Long-Term Winners
Higher labor costs, increased shipping prices, and other inflationary concerns impact all retailers. As an investor, ask yourself which companies will be best able to mitigate those issues? Will it be supermarket chains and retailers much smaller than Walmart, Costco, Target, and Amazon or the biggest companies who have invested most-heavily in managing costs and refining their supply chains?
Even in a recession, people need to eat, and they will shop at the retailers that offer the best prices. Target, Walmart, Amazon, and Costco have done what they need to do to offer the best prices no matter what the market conditions are.
At the moment, all four have opted to absorb some of the higher costs rather than passing them on to their customers. That’s an investment in serving their customers and growing market share. Making less money for a few quarters during historically unprecedented times does not reflect weakness in these companies, it actually shows off their strength as long-term investments.