Buyer's Remorse

By Nicholas Jasinski |  Wednesday, May 18 Refund Please. Stocks embarked on a one-way trip down today, after earnings and guidance from a key retailer badly missed the target. The Dow Jones Industrial Average slid 3.6%, the S&P 500 dropped 4%, and the Nasdaq Composite tumbled 4.7%. All three indexes are at or near their lowest closing values in more than a year. The trigger for the declines was Target's fiscal first-quarter report, which was chock-full of ominous indicators for the broader market and corporate America. The big-box retailer took in a better-than-expected $25.1 billion in sales in the period, which included February, March, and April. That was up 4% from the same three months of 2021. But Target badly underperformed expectations on the bottom line. Net income was just above $1 billion, down 50% from the year-ago period and almost half a billion short of the consensus forecast. Teresa Rivas and Joe Woelfel have all the details from Target's report here. Broadly speaking, inflation was to blame for the muddled results. Higher sticker prices for products on Target's shelves boosted its revenue, as at other retailers. But expenses were up even more, crimping profit margins and weighing on earnings. “Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time,” Target CEO Brian Cornell said on this morning's earnings call. Management cited transportation and supply-chain costs, in particular, as adding to expenses. More worryingly, executives pointed to signs of budget-conscious consumers shifting their spending away from profitable discretionary purchases like home goods and apparel and toward lower-margin groceries and other staples. Compared to the year-ago period, inflation has boosted prices of necessities and federal stimulus checks are a distant memory. Target management said it expects that dynamic to continue in coming quarters. Similar pain has been felt across the retail industry this earnings season, most notably at Walmart. Target stock finished the day down 25%, while dragging down the whole sector. The SPDR S&P Retail exchange-traded fund (XRT) slid more than 8%. More on the broader takeaway from the results below. All 11 sectors of the S&P 500 closed in the red today, as investors extrapolated Target's problems to the broader market. Just eight components of the index rose on the day, led by TJX, which bucked the trend among retailers. There also may have been some selling after yesterday's solid gains. The mood among investors lately has been less "buy the dip" and more "sell the rally." Things weren't looking great for tomorrow either, with Cisco Systems delivering disappointing results and guidance this evening for its fiscal quarter which ends in April. The networking hardware giant blamed Covid-19 lockdowns in China for limiting its ability to meet customer demand, with the problems particularly acute in April. That's bad news for stocks of other tech hardware makers. Wall Street will now be expecting bad results from them when they report second quarter numbers this summer. It's the latest hit to the already under-pressure tech sector. Cisco shares were down more than 12% in after-hours trading tonight. Eric Savitz has coverage of the results here.

 

DJIA: -3.57% to 31,490.07 S&P 500: -4.04% to 3,923.68 Nasdaq: -4.73% to 11,418.15 The Hot Stock: TJX +7.1% The Biggest Loser: Target -24.9% Best Sector: Consumer Discretionary -6.5% Worst Sector: Utilities -1%