Infotech

Narrowing of US retail margins worries Wall Street



“The year has started below our expectations”. The sentence, quoted Thursday by the Kohl’s department store chain to comment on its first quarter results, sums up the mood of the American supermarket chain. On Wednesday, it was also an operating margin “below our expectations” in Target stores, at 5.3%, which alarmed investors and caused the brand’s price to drop by 25% on Wall Street.

The financial markets, which are watching, against a backdrop of monetary tightening, for any sign that could herald a recession, saw in this the confirmation of a change in trend. The day before, already the results of Walmart, the number one retailer, had been deemed disappointing.

The environment is much less buoyant for the sector. Purchasing power support plans have come to an end, inflation is galloping (+8.3% over one year in April) and confined households have taken advantage of the Covid years to upgrade their household equipment. Their preference is now more for services than for goods. In other words, they spend more on leisure and travel and less on amenities.

Stocks on arms

On Wednesday, Target CEO Brian Cornell justified its mixed results on “much higher-than-expected transportation costs and a more dramatic change in our sales mix than we anticipated.” The company was left with inventory on hand, which weighed on its margins. At Walmart, groceries also outsold household goods.

The retailer has begun to revise its 2022 performance forecast downward. On Thursday, Kohl’s said it expects sales growth of at best 1% this year, two points less than it expected. at the beginning of the year. Target is betting on an operating margin rate of around 6% this year, against “8% or higher” anticipated in early March. Walmart expects operating income to decline by about 1% over the year, instead of an increase of around 3%.

In a context of high inflation, low price specialists could attract consumers, but they are also very constrained on their margins. The dollar store networks Dollar General and Dollar Tree will present their results on May 26, but they have already fallen heavily on the stock market on Wednesday. From Lowe’s to Home Depot via Bed Bath & Beyond, home equipment and DIY specialists also have to contend with skyrocketing commodity prices, and a real estate market hampered by excessively high prices.

Slow-down

“Consumers’ tolerance for high inflation will continue to be tested, and the renewed spike in gasoline prices, combined with tighter financial conditions, will weigh on households’ willingness to spend on big-ticket items” , says Lydia Boussour, economist at Oxford Economics. All sectors combined, household consumption should increase by 3.2% this year, estimates the research company, before slowing to around 2% next year.

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