Latest 12 months wholesale price inflation ran 11% … Walmart and Target have big 2Q earnings misses …Oops!

Retail demand does not seem to be the problem

In a market where computers and ETFs have no discernment, everything goes on sale.

Retail may be uniquely advantaged when it comes to thriving in an inflationary environment.

Panic set in as today’s retail meltdown brought the twin bugaboos of inflation and higher rates back into focus.

The last time we had this type of inflation was the mid-to-late 1970s, and the result was not what the media would lead you to believe.

Oops! Who forgot to raise the prices?

Costs and wholesale price increases were the culprits in Walmart’s precipitous decline over the last couple of days (20%).

“Walmart (NYSE: WMT) reported Q1 results with revenue of $141.6 billion (+2.4% YoY) that beat consensus by $3.55 billion while EPS of $1.3 missed $0.18 consensus. Gross margin came in at 23.8%, below 24.4% consensus/24.7% in FY1Q22. Lower margins were primarily due to a number of inflationary factors including higher (1) wage expenses (overstaffing), (2) product costs, and (3) fuel and supply chain costs, each contributing 1/3 of the total margin impact.” (SeekingAlpha contributor, Albert Lin, CFA) This is again with a 3.55% beat on the top line and a 3% comparable store sales gain v.s 2.5% expected.

These are the same issues facing Target (a twenty-five percent decliner today).

It seems likely that someone forgot to raise prices to reflect the costs and wholesale price increases that should have been relatively easy to see coming. The story appears to be the same at Target. My sense is that there should be simple fixes put in place at both companies — RAISE PRICES! Consumers will be expecting it considering the comprehensive coverage the media (not your friend) has given the issue. 

It is not about demand!

“Retail sales—a measure of spending at stores, online and in restaurants—rose a seasonally adjusted 0.9% last month compared with March, the Commerce Department said Tuesday. That marked the fourth straight month of higher retail spending.” It is not about discernment either. In a market dominated by ETF’s and computer-algorithmic trading there is no distinguishing between babies and bath water. Nothing worked in encluding stocks supposed to do well in higher inflation environments (may require subscription to CNBC pro). Everything was on sale today.

Retail is uniquely advantaged when it comes to surviving inflation.

With a keystroke, many of these technologically advanced companies may raise prices along with their entire merchandise plan. We can expect this going forward. 

Back in the early 1980s, a couple of retail analysts at Kidder, Peabody, Dan Barry, and Bob Simonson, came up with a concept called the “inflation gap.”  Simply stated in the obvious inflationary times that existed back then (and now) retailers would take price increases knowing costs were going to be moving up, but when they took price they would always take more than needed to cover costs (the Inflation Gap). This would protect themselves from exactly what has happened to Target and Walmart. It was not bad for earnings or revenue growth either. I will be surprised if WMT or TGT don’t act in a similar way.

Today’s meltdown brings the dread twins back into focus.

I believe this focus to be a media route to more clicks and audiences by accentuating the negative without actually informing or giving facts that would tend to dispel some of the fear and panic demonstrated in today’s market. The evil twins, inflation and interest rates, are at it again. They sold everything today, including the inflation beneficiary names in energy. Don’t confuse me with the facts, just get me out!

I will end on a positive, factual note from the mid-1970s and early 1980s

In 1974 the rate of inflation was 11.04%. By 1981 it had declined somewhat, down to 8.9%. On December 31, 1974, the UST 10-year note was yielding 7.4% on its way to 13.98%, on December 31, 1981. From December 1974 to December 1981 the S&P 500 nearly doubled from 67.16 to 122.55. This is a historical fact. The only part of the market that did not do well during that period was the ‘nifty-50’ stocks, the tech/ innovation trade of that era (history may not repeat itself but certainly can rhyme). Earnings were on the rise because companies had pricing power. Multiples were in decline because of high-interest rates competition. These rates were a huge drag on the high multiple stocks of that era.

Is this what you would have expected to learn based on today’s media coverage?

Stay The Course. We’ve Been This Way Before.