What happened
As you've probably heard by now, shares of Walmart (WMT 2.15%) jumped nearly 6% in afternoon trading today after the retail giant reported a big earnings beat -- $0.14 more than analysts were expecting.
Responding to that good news, shares of other retailers are enjoying bounces of their own -- indeed, several of them are rising even more than Walmart itself. As of 1:40 p.m. ET, shares of American Eagle Outfitters (AEO 6.95%) are gaining 9.4%, Kohl's (KSS 9.72%) stock is up 9.5%, and Abercrombie & Fitch (ANF 7.26%) is knocking it absolutely out of the park with a 13% gain.
NYSE: ANF
Key Data Points
So what
In this morning's report, Walmart observed that its second-quarter 2022 sales ended up coming in "well ahead of plan," with same-store sales rising 10% year over year -- albeit much of the increase was due to inflation raising the price of goods sold. That's still a trend that could extend to rival retailers specializing in clothing, such as American Eagle, Abercrombie, and to an extent, Kohl's.
That being said, not all of Walmart's news was good. Profit margins, for example, declined as the retailer discounted overstocked goods to clear out stale inventory (and wasn't even entirely successful in that, because inventories still grew 26% year over year, although the company said 40% of that increase was due to inflation). This discounting by Walmart could end up hurting sales at rivals such as American Eagle, Abercrombie, and Kohl's, which will need to compete with Walmart's lower prices. It's also likely to result in weaker profits, as even Walmart's earnings in Q2 -- while ahead of estimates -- were a penny lower than in the year-earlier quarter.
Now what
Looking ahead, Walmart's report contains both good and bad news for its peers. On the good news side of things, the retail giant observed that the Q3 back-to-school season "is off to a solid start" with good sales and -- this could be important -- "lower-than-expected supply chain cost" that might translate into somewhat stronger profit margins than we've been seeing of late.
Meanwhile, inflation is still a problem, and higher fuel costs (i.e., higher transportation costs) will continue to inflate the cost of goods sold to some extent, even if perhaps not quite so badly as feared last quarter. Also of concern to companies competing with Walmart is management's promise to take "additional pricing actions in Q3 to improve inventory levels in the back half of the year."
As Walmart rolls back prices to clear inventory, its rivals are probably going to feel compelled to match the action, to the detriment of their sales numbers, and probably profits as well. Walmart itself is telling investors to expect same-store sales growth of only 3% and an 8% to 10% decline in operating profit in Q3. I'd expect competitors to face similar problems in the coming quarter.
With P/E ratios of just 5 times trailing earnings (Kohl's), 6 times earnings (Abercrombie), and 7.2 times earnings (American Eagle), these retail stocks may look cheap right now -- but they're cheap for a reason. If profits continue to tumble in the retail sector, then even given constant share prices, the lower earnings will force P/E ratios higher.
Long story short, these stocks may not be as cheap as they appear.
