What happened

Shares of a broad swath of retail stocks slumped on Tuesday, as a guidance cut by one retailer sent shivers throughout the sector, sending fearful investors running for the exits. The catalyst that sent these retail stocks lower was a profit warning issued by Walmart (WMT -1.69%)

Walmart was the biggest loser, tumbling by as much as 9.1%, Kohl's (KSS -0.61%) stock was down as much as 7.5%, Target (TGT 0.98%) was off by as much as 5.1%, and Amazon (AMZN 2.08%) slipped as much as 4.8%. As of 1:25 a.m. ET, the quartet were still trading lower, down 7.5%, 7%, 4.9%, and 4.6%, respectively.

So what

In a press release that dropped after market close on Monday, Walmart revised its outlook for the second quarter and full year. The company said the changes were primarily the result of price reductions aimed at improving surging inventory levels. 

Walmart is now guiding for year-over-year net sales growth of roughly 7.5% in the second quarter, while operating income is expected to fall between 13% and 14%. This will pull adjusted earnings per share (EPS) down between 8% and 9%. To put those numbers in context, management was previously guiding for net sales growth of 5%, while EPS were expected to be flat to slightly higher. 

The company issued a similarly dour forecast for the remainder of the year. Walmart now anticipates full-year sales to increase 4.5% or 5.5% (excluding the sale of its operations in Japan and the U.K. last year). It expects a big hit to profits, with EPS down 10% to 12%, excluding the divestitures. Walmart had previously guided for net sales growth of 4.5% to 5% (excluding divestitures) and EPS that were essentially flat.

The reduced guidance was also accompanied by a wave of price-target reductions by Wall Street analysts. DA Davidson analyst Michael Baker lowered his price target on Walmart stock to $148, down from $162, though he maintained his buy rating on the shares. This represents roughly 12% upside for investors, compared to Monday's closing price. While Baker maintains a positive long-term outlook for Walmart, he had expected the company to hold up better given its product mix, which includes fewer discretionary items. 

Truist analyst Scot Ciccarelli lowered his price target on Walmart stock to $117 rom $139, while maintaining a hold rating on the shares. This suggests the shares could fall another 11%, compared to Monday's closing price.

While he views Walmart's overall sales trends as solid, Ciccarelli is troubled by the sales-mix shift and the accelerating markdowns in some categories, including apparel, to clear out excess inventory. The analyst suggests low- to middle-income consumers are feeling the bite of inflation, which is having a bigger impact on purchasing behavior than previously believed. 

Now what

As the largest brick-and-mortar retailer in the U.S., Walmart is considered to be something of a bellwether for the overall economy. If the consumer-buying behavior at Walmart is indicative of that at other retailers, this could be the canary in the coal mine for the retail sector, though we've already had signs of tough times ahead.

After releasing disappointing first-quarter earnings results in May, Target announced plans to shift its strategy to better fit the current economic headwinds and "rapidly changing environment." This includes "additional markdowns, removing excess inventory, and canceling orders."

As a result of these adjustments, Target expects full-year revenue to grow in the low- to mid-single-digit range. The company is also forecasting an operating margin of roughly 6% in the back half of the year, exceeding Target's "average fall season performance in the years leading up to the pandemic." 

Kohl's experienced a similarly difficult first quarter and was working to adjust its strategy. The retailer said it plans to open smaller-format stores in new markets, remodel existing locations, and improve its omni-channel capabilities.

Management noted that in 2021, 99% of its 1,165 stores were cash flow positive, and that 80% of Americans live within 15 miles of a Kohl's location. By entering new markets, the company expects to expand upon its existing footprint and is building on its success. 

Amazon also struggled in the first quarter, suggesting that the slowing growth of e-commerce continued. The company planned to focus on "improving productivity and cost efficiencies throughout [its] fulfillment network." Then, earlier this month, the online retailer announced that its just-completed Prime Day was its biggest ever.

While the company doesn't release specific sales figures, it did say that shoppers stocked up on discounted items, leading to "record-breaking" sales. It remains to be seen if this translates to improved financial results. 

With inflation at 40-year highs, consumers have increasingly difficult purchase decisions to make. The success or failure of these midyear shifts will help determine whether these retail stocks rebound or have further to fall.