It is not often that we hear retail companies cite the “macro” environment as a major headwind when reporting quarterly results. Repeatedly, large retailers are recording very poor earnings and subdued forward guidance.

Walmart (WMT) badly missed earnings expectations for the fiscal first quarter, as the retailer felt cost pressure from fuel prices, higher inventory levels and overstaffing. Moreover, the nation’s largest retailer expected lowered profit margins. Target (TGT) stocks tumbled around 20% after reporting first quarter results. The consumer may be alive, but is not well. 

At the broadest level, the World Bank has slashed its global growth forecast by half from 5.7% to 2.9% for 2022(Global downgrade). The OECD has joined the chorus predicting global growth this year will be substantially below earlier estimates made at the beginning of 2022. Domestically, a widely watched Federal Reserve forecast model is indicating that the U.S. economy is quickly losing steam. The Atlanta Federal Reserve’s GDPNow tracker is pointing to an annualized gain of just 0.9% for the second quarter, down from an estimated 1.3% increase less than a week ago. (Atlanta Fed’s GDPNow tracker). Many observes anticipate a second quarter negative growth which would put the US economy technically into a recession (i.e., two successive quarterly contraction in GDP).

Figure 1 GDPNow Forecast

In an earlier blog. I reported that the corporate sector  is showing considerable weakness, signaling a soft landing is less and less likely (Retail profits tumble ). The nation’s the largest store retailers are proxies for the outlook for overall consumption. The major big retailers have inventories in excess of customer demand and inventory-to sales ratios are at the highest levels since the onset of the pandemic in March 2020. Inventories are accumulating as shoppers resist discretionary spending in response to higher prices. More to the point, store owners failed to match orders to demand and are now are stuck with inventories that that will mostly likely be discounted in order to clear shelves for the next season merchandise. The way in which the companies missed their profit mark is very telling as to how recessionary forces are affecting their bottom line. 

Figure 2 Inventory-to-Sales Ratios

Source: Wall Street Journal

Consumer weakness is now showing up in the world of fintech, where market valuations have tumble by 50% in the space of 6 months. Fintech companies enjoyed a huge surge in demand throughout the worse of the pandemic. But now e-commerce spending is decelerating, such that Amazon (AMZN)  recorded a drop in retail sales in Q1.

Fintech companies specializing in ‘buy now, pay later’ , often considered to the canary in the coal mine, have experienced significant declines in market valuations. These companies are struggling with declining decline and rising delinquencies , despite the convenience of generous payments schedules. Examples are Affirm (AFRM), Afterpay (AFTPF), and even Paypal (PYPL).