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Massive Markdowns Might Add Up to Earnings-Season Bloodbath

Investors hammered Walmart’s stock after the retailer said it’s slashing apparel prices in hopes of persuading inflation-hit consumers to buy when their focus is on how expensive it’s getting just to put food on the table. Shares of Walmart stock closed down 7.6 percent Tuesday, wiping out billions in value.

The mega-chain’s grim news set the tone for an earnings season about to kick into high gear. Adidas on Tuesday followed in Walmart’s footsteps, saying it now expects to earn nearly one-third less income this year.

In short, “everybody’s worried,” said Walter Loeb, a retail consultant who spent two decades at Macy’s and other retailers before a 16-year stint as a senior retail analyst for Morgan Stanley.

Retailers are concerned that slowing sales will eat into profits, he added, pointing to the sector’s massive inventory problem that already forced Target to drastically scale back orders and trot out the discounts.

“We’ve already seen Black Friday sales in July from Macy’s and Best Buy, two companies that do need to lower their inventory levels,” Loeb said. “Calling promotions Black Friday in July is an absolute indication of desperation.”

Those aren’t the only merchants straining under a mountain of slow-selling stock, Loeb said. He sees similar problems at Dick’s Sporting Goods and Gap Inc., which parted ways with CEO Sonia Syngal earlier this month and is now going hard on a Yeezy Gap IRL rollout. Kohl’s, which is regrouping after a months-long sale saga sputtered out, is another chain that could find itself in a tight spot merchandise-wise.

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Target and Walmart sounded the alarm earlier this year when they said deliveries hung up in the supply chain finally arrived when shoppers weren’t interested in buying that product anymore.

Skechers on Tuesday managed to buck the trend by reporting $1.87 billion in second-quarter sales, up 12.4 percent over a year ago. Wholesale growth (18.3 percent) outperformed direct-to-consumer (4.3 percent), with chief operating officer David Weinberg describing the “new quarterly sales record” as a “significant accomplishment especially given the macroeconomic headwinds, supply chain issues and COVID-related restrictions in China during the period.”

When Walmart on Monday lowered its full-year earnings outlook, CEO Doug McMillon said he expects “more pressure on general merchandise in the back half.” No matter how low clothing prices go, some shoppers still won’t have the means to pay for new apparel when gas and groceries are gobbling up their budgets, though parents usually find a way to afford back-to-school staples.

With retail sales trends heading south, Wells Fargo retail analyst Ike Boruchow is ready for a wave of companies missing targets or cutting their outlook.

“We remain downbeat on the near-term fundamental prospects in our space,” he said, pointing to Bed Bath & Beyond lowering its forecast when it recently gave CEO Mark Tritton his marching orders. He’s far from the only CEO who’s been left out in the cold when the going gets tough and corporate boards need a fall guy.

For Boruchow, sluggish foot traffic trends through mid-July are a worrying sign that portends disaster for retail sales. He sees the next few weeks of earnings reports as an “upcoming catalyst that will bring more bad news to the space,” with retailers suffering more than the vendors who serve them, in his opinion.

July’s Consumer Confidence Index from The Conference Board supports the general concern for the retail sector, given that the Index fell for the third month in a row to 95.7 from 98.4.

Both components of the Index saw a decrease, with the Present Situation portion falling to 141.3 from 147.2, while the Expectations component inched down to 65.3 from 65.8. Essentially, this means respondents are bracing for a growth slowdown  at the start of the quarter, but even looking out six months, they’re also not feeling great about their short-term financial prospects, with 15.7 percent expecting their incomes to decrease, up from 15.3 percent last month.

Wells Fargo economists Tim Quinlan and Shannon Seery described the crumbling confidence report as “darkening clouds” where high inflation, rising interest rates and volatile financial markets run roughshod over the landscape.

“Even during the worst of the pandemic, consumers kept their chin up in regard to the future,” they wrote. “But forward-looking sentiment is not faring as well against the confluence of factors impacting consumers today; the expectations component dropped to its lowest level since 2013.”