Target and Walmart got hammered on Wall Street

Target and Walmart have both been among the biggest winners of the pandemic era. However, the Q1/2022 from both of the companies was a big disappointment for the Wall Street. The share prices of the companies really plummeted during this week.

Why did Wall Street react so furiously?

Growing inventories leading to decreased margins

Both Walmart and Target were able to sustain growth, albeit with a rather low growth rate. Both grew by 4% (for Walmart US business grew by 4%, total by 2,4%). The big problem for especially Target was the fact that during uncertain and tumultuous pandemic times, the supply chains were strained and created a lot of uncertainty. Also there was a lot of unclarity with regard to how consumers would behave in the post-pandemic retail environment.

This uncertainty lead to a cycle of inventory growth

• both retailers (as well as Amazon) stocked up with inventory to make sure they had enough products to sell

• that in turn lead to rapidly growing inventory levels as the products did not fly off the shelves as forecasted

• the rising inventory levels lead to decreased operating margins

• that in turn lead to surprise and dissatisfaction among the investor community

On the other hand, when the inventory or margin levels are compared to a longer trend for the companies, one can see that they are rather normal. The pandemic provided a time of heightened profitability and higher inventory turnovers due to the unprecedented growth.