What happened

Retail stocks including Gap (GPS -0.73%)Nordstrom (JWN 0.24%)Stitch Fix (SFIX -1.67%), Torrid Holdings (CURV 0.67%), Children's Place (PLCE -2.09%), and Wayfair (W -2.29%) were all moving higher today after Walmart (WMT 1.00%) delivered better-than-expected results in its second-quarter earnings report.

As the biggest retailer in the world, Walmart has an outsized influence on other retail stocks, and it's also one of the first brick-and-mortar retailers to report earnings, so its results are seen as a harbinger for its smaller peers. 

Just weeks ago, Walmart slashed its guidance due to challenges from inflation and excess inventory, an announcement that sent both its stock and those of its peers listed above sliding. You can see the impact from the chart below.

WMT Chart

WMT data by YCharts

Today was a reversal of that movement as good news from Walmart sent the sector higher.

Walmart stock closed up 5.1%, while Nordstrom gained 7.6%; Gap was up 7.3%; Torrid was 8.2% higher; Wayfair rose 7.6%; Children's Place was up 10.1%, and Stitch Fix jumped 20.2%.

So what

Walmart beat estimates on top and bottom lines in its second-quarter earnings report, assuaging fears about the retail sector after its guidance cut a few weeks earlier. Revenue rose 8.4% to $152.9 billion, ahead of estimates of $150.8 billion, and comparable sales at U.S. stores were up 6.5%. On the bottom line, adjusted earnings per share (EPS) basically held steady, falling just from $1.78 to $1.77, which beat expectations of $1.62. 

The report seemed to send a message that the earlier fears about falling profits were unwarranted. Walmart maintained its guidance for the second half of the year, calling for a decline in adjusted EPS of 9% to 11% in the third quarter and a similar slide in the fourth quarter. Nonetheless, the full-year guidance improved due to the better-than-expected performance in the second quarter.

Part of the reason why all of the stocks above surged on the Walmart news is that these are all struggling retailers, making them especially sensitive to macroeconomic conditions, as a modest improvement in the economy could make a big difference on the bottom line.

Gap, for example, seems forever in the midst of a turnaround, especially after CEO Sonia Syngal stepped down last month. Syngal was brought in shortly after Gap abandoned plans to spin off Old Navy. In its most recent quarter, Gap's comparable sales fell 14% and it posted a loss of $162 million, or $0.44 per share.

Department stores like Nordstrom have also struggled during the pandemic, and though the company has issued strong earnings guidance and is calling for revenue growth of 6% to 8% this year, the market still seems skeptical that it can deliver long-term growth.

Torrid Holdings, which specializes in plus-sized women's apparel, looked strong coming out of the gate in its IPO last year, but its momentum has since faded. Sales grew just 1% in its most recent quarter, and gross profit was down.

Stitch Fix stock has collapsed over the last year-and-a-half as its growth story has ground to a halt and its direct-shopping program, Freestyle, hasn't delivered the boost investors hoped. Revenue fell 8% in the most recent quarter; it lost active customers, and it lost money according to every major metric.

Children's Place, meanwhile, posted blowout results in 2021, but revenue and profits fell sharply in the first quarter as it lapped a quarter when stimulus checks were sent out. It also declined to give guidance due to macro uncertainty. As a result, investors are skeptical of its long-term trajectory.

Finally, Wayfair was a big winner during the pandemic, but sales have pulled back as consumer spending normalizes. In its most recent quarter, revenue fell 15% and it posted an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) loss of $108 million. 

Now what

The gains in these stocks could be short-lived. After all, a better-than-expected earnings report from Walmart doesn't mean their own quarterly results will shine, and most of these earnings reports are due out in the next week or two.

Still, it is good news that Walmart's results were better than expected, and also that inflation and gas prices are coming down. If the economy can avoid a recession, there's no question that these retail stocks and the rest of the industry will benefit.