US retailers caused some turmoil on the markets earlier this week. Target warned that its earnings will be negatively impacted as it has amassed a stockpile of goods that it now struggles to sell with profit. However, the problem is likely to be broad and relating to other companies from the sector as well. Let's take a look at the US largest retailer - Walmart - and how he compares to peers.
Target's warning pressures retailers
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Create account Try a demo Download mobile app Download mobile appTarget warned on Tuesday that it struggles with a high inventory of unwanted products as demand for those goods waned. As such the company said that it may have to offload those products at lower prices in order to free up some space in warehouses for other products that are expected to be in higher demand due to their cyclical nature. Target also said that it has to cancel some orders which would also squeeze profits. As a result, the company expects its operating margin to shrink from 5.3% reported in Q1 2022 to around 2% in Q2 2022. This was the second profit warning from Target in a month and has exerted pressure on shares of the company as well as its peers, like Walmart, Costco or Dollar General.
Walmart struggles with inventory as well
While Walmart has also moved lower following a warning from Target, a drop in share price was relatively small. Stock launched Wednesday's session around 3.5% lower but has managed to trim the drop to around 1.2% by the end of the session. As we have said earlier, a build-up of inventory is not limited to Target - Walmart's inventory jumped 32% YoY in Q1 2022. While a bulk of this inventory can be ascribed to Walmart stocking up on goods previously unavailable due to supply chain issues, the company said that around a fifth was ascribed to build-up of products for which demand turned out not to be as strong as expected. Company expects that it will take two or more quarters to get rid of inventory glut, what will weigh on results.
Valuation: Walmart vs peers
However, as it is a sector-wide issue, we should look at how Walmart compares to industry peers and whether it could be seen as a good investment or not. Some of the most popular stock multiples were presented in the table below for Walmart as well as 5 of its competitors from the US market. Each Walmart's multiple will is compared to capitalization-weighted average of values for Walmart and its 5 peers. As one can see, Walmart looks "cheaper" than peer average in each case. However, while Walmart's valuation looks more favorable than that of a peer group, traders should keep in mind that high inflation discourages customers from shopping as much as they used to and therefore outlook for future quarters is somewhat soft.
Comparison of stock multiples of Walmart and its peers. Source: Bloomberg, XTB Research
A look at the chart
Profit warnings released by US retailers after publication of Q1 results, triggered a very steep drop in Walmart's share price (orange circle). This plunge was halted at the $118 support zone, slightly above the textbook range of a downside breakout from the trading range since September 2020 ($115.60). Stock tried to recover somewhat later on but the recovery run was halted by the $128 resistance. These two zones are key levels to watch now and a period of range trading cannot be ruled out.
Source: xStation5
