Walmart, Gap, Nordstrom Unnerve Investors Ahead of Crucial Holiday Season

Walmart, Gap, Nordstrom Unnerve Investors Ahead of Crucial Holiday Season
Walmart, Gap, Nordstrom Unnerve Investors Ahead of Crucial Holiday Season/courtesy

From Gap Inc. to Nordstrom Inc., retailers say they are unable to capitalize on increased demand this holiday season due to supply chain disruptions, which result in empty shelves and dissatisfied customers. Meanwhile, while Walmart Inc. and Target Corp. have plenty of inventory, their profitability is being questioned.

 

Even some of the early winners have succumbed to the pessimism: Macy’s Inc. has given up the majority of its results-driven stock gain from last week, while Kohl’s Corp. shares have fallen below their pre-earnings level. Maintaining or expanding staffing levels adds to the headaches — and costs — for both large and small businesses.

 

Despite a mostly positive economic backdrop, the retail industry in the United States is entering the busiest shopping season of the year under a cloud of doubt. Despite the fact that inflation is at a three-decade high, consumer spending is on the rise. The question is how much profit retailers will make from what is expected to be a record-breaking holiday season.

 

“The consumer is in fantastic shape, and their willingness to spend is at an all-time high,” said Brian Yarbrough, an Edward Jones analyst. “The cost of the supply chain and product availability are the bigger issues.”

It’s not all doom and gloom. Despite this week’s chaos, Wall Street hasn’t abandoned retailers. A broad S&P 500 retail index has gained 2.5 percent since Nov. 12, reflecting, in part, the expectation of strong consumer spending. The index is up 25% year to date, which is the same as the S&P 500 as a whole.

 

During that time, Home Depot Inc.’s stock has risen 11%, surpassing Walmart in market value, thanks to strong demand from do-it-yourselfers and the US housing industry. Dollar Tree Inc. has led the industry with a 30 percent increase over the same period, thanks to its decision to abandon its namesake price point and charge $1.25 for the majority of its items.

 

There’s no doubt that shoppers are reaching for their wallets. According to the Adobe Digital Economy Index, online consumer spending increased by 20% this month through Tuesday, indicating that holiday shopping has begun early.

 

According to Adobe, US e-commerce spending is expected to rise 10% to a record $207 billion in the final two months of the year. Total holiday sales will rise 8.5 percent to 10.5 percent from 2020 to $859 billion, according to the National Retail Federation.

 

Costs Not Included

 

However, meeting that demand is likely to be costly. To avoid some of the supply chain bottlenecks, Walmart and Target chartered their own cargo ships. That helped them bolster inventory, fueling confidence that their shelves will be well stocked. But the extra costs contributed to declines in their gross margin, a key measure of profitability, which rattled investors.

 

Nike Inc. said higher air freight costs during the holiday season would crimp profitability. Switching to air freight from ocean transportation was a drag on Gap, too. And even after putting more merchandise on planes, Gap still suffered from “acute supply chain headwinds” that left the company unable to take advantage of strong demand, chief executive officer Sonia Syngal said.

 

Supply problems also felled Nordstrom, which ran short of key items such as women’s shoes and apparel at its Rack off-price chain. Gap and Nordstrom both fell the most on record in Wednesday trading.

 

With slow transportation causing delays in product shipments, many retailers will have less time to sell their goods before Christmas. Gap, for example, “may have to engage in promos if demand slows, partially undoing the inventory rationalization efforts through last year,” Cowen & Co. analyst Oliver Chen said in a report.

 

To be sure, demand doesn’t appear poised for a slowdown during this holiday season. But if shoppers start to retrench next year amid a broad rise in costs, the road for retailers may get rockier.

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