What happened
Wednesday was a rough day for investors in many retailing stocks. Dollar Tree (DLTR -0.57%), Tractor Supply (TSCO 2.76%), and BJ's Wholesale Club (BJ 0.79%) shares each fell by more than 10% by 12:30 p.m. ET, compared to a 2.7% slump in the S&P 500.
The retailing segment seemed to drive the decline in the wider market, and that pressure came from tough earnings news out of Target (TGT -0.54%), one of the industry's biggest players.
Image source: Getty Images.
So what
Target said early Wednesday that sales expanded roughly 4% to $24.8 billion in the selling period that ended in late April. That result edged past expectations and was powered by healthy customer traffic.
However, as Walmart revealed earlier in the week, the gains came with a big drawback.
Profitability plunged, with operating margin diving to 5% of sales from 10% a year ago. That decline suggests at least part of the margin gains that Target enjoyed in earlier phases of the pandemic was just a temporary factor. The profit margin was "well below where we expect to operate over time," CEO Brian Cornell said in a press release .
Just about every retailing business fell along with Target in response to this news. Smaller peers like Dollar Tree may face similar margin declines, and investors are worried about the discount chain's upcoming earnings report, slated for Thursday, May 26.
Tractor Supply, meanwhile, posted a fantastic increase in its profitability over the past two years that was driven by many of the same factors that pushed Target's higher. These include a tilt in demand toward fast home delivery and premium products. The company gave no indication of an impending reversal of its profitability wins in late April. But Wall Street is concerned that such a downgrade is coming.
BJ's Wholesale reports its earnings results on Thursday, and investors are worried that the wholesale retailer will scale back expectations on short-term profits for the same reason that Target did today.
Now what
It might seem like an overreaction for investors to push the share prices down for BJ's, Tractor Supply, and Dollar Tree, given that these companies have yet to update shareholders on their latest operating trends. And Target's results hardly painted a dark picture of consumer spending trends. Customer traffic is still rising in its stores even compared to soaring results last year. And the retailer affirmed its 2022 sales outlook that calls for modest growth overall.
Yet Target dramatically reduced its short-term profitability outlook. And until these companies can prove otherwise, Wall Street is assuming that Dollar Tree, BJ's, and Tractor Supply will walk a similar path with their next earnings announcements.
