What happened

Shares of Wayfair (W -2.48%), Macy's (M -3.09%), and Nordstrom (JWN -0.14%) fell hard on Wednesday, down 12.5%, 11.8%, and 9.6%, respectively, as of 2:17 p.m. ET.

There wasn't any material news out of these retailers today. However, given Walmart's (WMT -0.18%) poor earnings report yesterday and Target's (TGT 0.43%) terrible earnings report today, investors appear to be selling any and all retail names.

So what

Even though inflation is high and there have been widespread concerns over highly valued tech stocks, the big box retailers appeared to be safe havens since the start of the year. After all, retail spending statistics from March and April were pretty good. Yesterday's retail sales report from April showed a 0.9% month-over-month increase, and March sales were revised higher.

However, it may appear that retail sales aren't strong enough to offset cost inflation. Yesterday, Walmart beat on revenue but missed badly on earnings per share, and lowered its profit guidance for the year, even though sales should be higher. Then today, Target reported a beat on sales, but its operating margins absolutely crashed, going down to 5.3% from 9.2% in the year-ago quarter. As a result, earnings per share were nearly cut in half! Management cited lower prices to move excess inventory, as well as higher transportation costs.

That appears to indicate consumers are slowing down their spending on physical goods. Meanwhile, higher transportation costs are raising costs. That's not good for any retailer, these three included. 

Yesterday, Wayfair announced a hiring freeze, a seeming admission that things are too uncertain right now amid the economic reopening. "We see a great deal of uncertainty in the overall economy and believe it's prudent to make some adjustments that will allow us to control our own destiny," a representative said. Two weeks ago, the online furniture retailer reported revenue that was down nearly 14% from a year earlier, as earnings swung to a loss. Clearly, as the pandemic wanes, Wayfair is seeing less demand for home furniture purchases as consumers' wallets are pinched and they focus more on experiences.

Could things be better for clothing and apparel retailers like Macy's and Nordstrom? After all, if people are going out more after the pandemic, maybe they will purchase a new shirt or set of khakis.

Investors won't know for sure yet, as Macy's and Nordstrom don't report first-quarter earnings until next week. Yet with commodity prices on the rise, one can be sure that these retailers' costs will be up. Whether they will be able to pass on those costs with price increases to consumers remains to be seen.

Woman shops in a fancy clothing store.

Image source: Getty Images.

Now what

When large retailers like Walmart and Target deliver bad news, one can be sure the rest of retail will catch whatever cold they have. Investors in the sector should be cautious right now, and think about which retailers might do better in an inflationary and reopening environment. Premium brands may hold up better than mass brands, since the high-end consumer will likely be able to weather higher prices better than the lower and middle-class consumers who frequent Walmart and Target. That could -- with an emphasis on the word could -- benefit Nordstrom.

Yet while apparel retailers may do relatively better given the reopening, clothing and apparel is also fairly discretionary. With consumers pulling back on discretionary purchases for more essentials and experiences, these stocks are still tough to own amid inflation and rising rates.