Target and Walmart are not alone in their earnings struggles as S&P 500 margins fall
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Are we witnessing a bearish market rally? Call it what you want, but the S & P 500 is now up 4% since Thursday’s close, and the Cboe Volatility Index (VIX) has gone from 34.7 to 26.2. We have 4% more volatility, and much less volatility. After its disappointing earnings, Target seems to be putting the brakes on market recovery. Target’s comments today are very much in line with Walmart’s on Tuesday. “The operating margin rate was 5.3%, which is mainly due to gross margin pressure reflecting measures to lower excess inventory, as well as higher transportation and freight costs,” Target said. The Target team also pointed out “supply chains disruptions and higher compensation and headcount within our distribution centres.” This 5.3% operating margin is well below the 9.8% margin from a year prior. The statement by Walmart CEO Doug McMillon the day before sounds much like his previous comments: “U.S. inflation levels, especially in fuel and food, placed more pressure than expected on our margin mix and operating expenses.” Target and Walmart don’t have it all. Margins for the overall S & P 500 remain relatively high but are off the historic highs we saw a year ago: S & P 500 profit margins: still high but declining Today: 12.09% Q4 2021: 13.4% Q3 2021: 13.2% Q2: 2021: 13.5% Source: S & P Global Still, 12.09% is nothing to scoff at. S & P 500 margins were in the 9%-11% range for many years before jumping a few years ago. That, along with Federal Reserve liquidity, was certainly a factor in the S & P 500’s outsized performance of the last few years. So much for the ‘defensive’ play on consumer staples If higher costs are pushing consumers, particularly those at the lower end, toward lower-priced private and generic labels (as Walmart seemed to imply) — that is a tough situation for old-school companies such as Procter & Gamble, who have many higher-priced brand labels. However, this may be a good thing for private-label companies. Kirkland, owned by Costco, is an example.
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