What happened

Children's apparel retailer The Children's Place (PLCE -4.18%) was one of several retail stocks taking a dive this week after Walmart (WMT 0.57%) slashed its earnings for the quarter and the full year, citing a wide range of challenges.

Since Walmart is the biggest retailer in the country (and the world), investors interpreted its update as a headwind for the broader retail sector, especially discretionary retailers, as Walmart noted headwinds in general merchandise, including apparel. Given its mention of apparel, it's not surprising that Children's Place stock fell as both it and Walmart are popular destinations for children's clothes.

According to data from S&P Global Market Intelligence, Children's Place stock was down 5.6% as of Thursday afternoon. On Tuesday, after the Walmart news came out, the stock dropped 9.5%.

So what

In its update, Walmart actually raised its comparable sales guidance for the second quarter from between 4% and 5% to 6% due to inflationary effects in food and fuel, but it now expects operating income to fall between 13% and 14% in the quarter. It said that higher prices in food and fuel were cutting into customers' budgets for general merchandise, in particular apparel, and it was forced to do more markdowns to move inventory, especially in apparel.

Walmart also said it was anticipating more pressure on general merchandise in the back half of the year.

Investors clearly interpreted the announcement as a negative for Children's Place, whose financial performance has been highly volatile during the pandemic. Sales and profits dove initially during the lockdown before surging last year as consumers spent their stimulus checks. More recently, that momentum has faded.

In its fiscal first-quarter earnings report, for the period ended April 30, sales and profits fell from the year-ago quarter, but were still above pre-pandemic levels.

Now what

Like other retailers, The Children's Place did see a spike in inventory in the first quarter. Its inventories were up 31.4% from Q1 2021 to $549.2 million, part of an industrywide pattern to overcome supply chain delays and avoid the kind of shortages that struck the industry last year.

Unfortunately, given Walmart's comments, declining consumer confidence, and high inflation, The Children's Place has also likely been forced to mark down its merchandise more than usual in the second quarter.

Analysts currently expect adjusted earnings per share to fall from $1.71 to $0.71, and for revenue to decline 6% to $390.4 million. The company hasn't announced an earnings date yet, but investors should expect the Q2 report sometime in mid-August.