The Week Retail Died

This week will go down as one of the most abysmal stretches ever for US retailers.

Shares of Ross were on track for their worst day since 1986 on Friday after the chain followed Walmart, Target and Kohl’s in adopting a cautious outlook.

I’d say the figure (below) gives you some context, but that wouldn’t be quite right. There isn’t any context. Not really, anyway. Friday’s collapse was mostly unprecedented.

“Although we continue to expect sales and profitability to improve as we move through the year, for the 52 weeks ending January 28, 2023, we now forecast comparable store sales to decline 2% to 4%,” CEO Barbara Rentler said, adding that the company was “disappointed” with its first quarter results. Operating margins in Q1 contracted 340bps versus last year’s levels.

“We knew fiscal 2022 would be a difficult year to predict, especially the first half when we were facing last year’s record levels of government stimulus and significant customer pent-up demand as COVID restrictions eased,” Rentler went on to say. “The external environment has also proven extremely challenging as the Russia-Ukraine conflict has exacerbated inflationary pressures on the consumer not seen in 40 years.”

Rentler also mentioned rising freight rates and higher wage costs. Merchandise inventory rose 57% YoY. Wells Fargo’s Ike Boruchow called Ross’s results “one of the most surprising/disappointing prints we’ve seen in 10+ years.”

Volatility for consumer discretionary shares is up sharply (figure above). Consumer stocks lost more than a half-trillion in market value over just five days.

As I’ve been keen to emphasize all week, the macro read-through is ominous. On one hand, it’s not surprising that discretionary spending is at risk. Stimulus checks dried up and the demise of Build Back Better meant the end of the expanded child tax credit. At the same time, the basic cost of living is rising faster than wages.

On the other hand, the almost identical color from management teams alongside surprisingly unfortunate guidance, admitted of little, if any, ambiguity: The consumer is faltering faster than many economists expected, and it sounds as though April was the breaking point. If that’s the case, it’s tragically ironic that the news came during a week when data suggested retail sales were better than expected last month.

Worryingly, there’s no shelter to be had in staples either (figure below).

Walmart and Target said shoppers are opting for store brands, and as their results made all too clear, it’s far from a safe bet that the “retailers to Main Street” will be able to navigate the macro environment any better than any other company.

The bottom line (figuratively and literally) is simple enough: The US consumer is beset by soaring costs for necessities and looks poised to retrench.

At the least, the “excess savings” narrative behind most constructive takes on the economy (and, by extension, equities) will be put to the test over the next several months.

As for retail stocks, next week is a veritable minefield. Gap, Macy’s, Dollar General and Costco all report.