What happened

As investors digested the $1.8 trillion coronavirus rescue bill that Congressional leaders agreed to this morning, stocks were mostly flat. However, a number of retailers were trading lower on what could have been a "buy the news, sell the rumor" event, as stocks had a record surge yesterday on hopes for a deal. Additionally, a decision by Target (TGT 1.28%) to pull its guidance and suspend share buybacks may have added to fears about the overall sector, as the big-box chain was believed to be one of the retailers better-positioned for the current environment.

As of 10:46 a.m. EDT this morning, Target was down 8.2%, while Walmart (WMT -0.65%) was off 4.6%, and Bed Bath & Beyond (BBBY) had given up 5%. The S&P 500 was unusually steady after days of record volatility, trading down just 0.1%.

A rack of sweaters in a retail store

Image source: Getty Images.

So what

Target, whose stores have stayed open during the crisis because they carry essentials like food and medicine, nonetheless issued a warning to investors, pulling its guidance and suspending buybacks. The retailer said it has experienced unusually strong customer traffic and sales because of the coronavirus outbreak with high demand for products like food, medicine, and cleaning supplies. As a result of that impact, Target said it would dial down the number of store remodels it had planned for the year from 300 to 130, and would only open 15 to 20 small-format stores this year instead of the 36 it had planned. Both initiatives will be moved out to 2021. Management also said it would increase pay by $2 per hour through May 2 for hourly employees in its stores and distribution centers.

The effect of crisis-related shopping on its financial performance appears to be mixed. The company said that comparable sales through March so far had surged more than 20%, but sales have been heavily skewed to lower-margin categories like food; it said comps in the essentials and food-and-beverage categories were up than more than 50%. However, comparable sales in higher-margin apparel and accessories are down more than 20%, which could push gross profit lower in the remainder of the quarter. It also said costs associated with higher pay, increased supply-chain volume, and additional store cleaning would lead to incremental expenses of more than $300 million in the first quarter, and those are likely to continue into the second quarter. Due to the uncertain environment, it said it would pull its guidance and pause share repurchases.

Investors interpreted that report negatively; they may have been hopeful that Target's profits would improve as consumers focus on stocking up on food essentials, as many Americans have been ordered to stay at home.

Target's update seems to bode poorly for Walmart, a stock that has outperformed in recent weeks as it has also seen a crush of shoppers. Walmart derives a significantly greater percentage of its sales from groceries than Target, but the high demand may also be straining its supply chain and labor force, adding unexpected costs. Meanwhile, news that India was going to do a three-week nationwide shutdown could impact Flipkart, the e-commerce company it took majority ownership of in 2018.

Bed Bath & Beyond, meanwhile, had already said it would close its namesake stores through April 3. Target's announcement did note that it saw strength in home-office products starting in mid-March, but its overall message seems to be a negative for the home-goods retailer: Consumers aren't focusing right now on buying items like furniture, bedding, and other home goods.

Now what

Target investors shouldn't be discouraged by the latest update; the company is doing the right thing to engender loyalty from both employees and customers, which will benefit investors over the long term. However, for the retail sector more generally, its update seems to imply that even retailers that are well-suited to the current shopping environment are seeing costs rise, and are likely taking a hit on the bottom line.

As the pandemic continues to spread and stores remain closed, retail stocks will remain in a difficult position.