Better Luck Next Year

The inflation story from America's largest retailers... Better luck next year... Target and Walmart shares plummet... $1 billion more in gas costs... Consumer sentiment is cratering... How to make money if stocks crash...

This earnings season is telling an inflation story...

Some of America's largest retailers – like Walmart (WMT) and Target (TGT) – just reported their financials for the first quarter of 2022. And each earnings report provided insight into what a world with decades-high inflation looks like...

In short, it's not looking good. Or, at the very least, it's looking different.

After reading Stansberry NewsWire analyst Daniel Smoot's report on Target's major miss in the first quarter (earnings per share of $2.19 compared with an estimated $3.07) this morning, we were left thinking, "Is anything going right?"

That's because, as Daniel wrote...

CEO Brian Cornell said TGT struggled with unexpectedly high costs throughout the quarter. He noted this was fueled by inventory impairments, lower-than-estimated discretionary sales, and supply-chain disruptions.

Meanwhile, the company highlighted that freight costs also surged. And TGT reported that it saw a sudden rise in order arrivals, which ultimately backed up its operations amid a shift in consumer preferences.

In turn, TGT provided a mostly disappointing outlook. The company said its second-quarter operating margin rate may be 5.3% versus the consensus of 9.4%. For the entire year, TGT reaffirmed low- to mid-single-digit revenue growth versus the expected 3.6% rise. And its operating margin may be around 6%, below its prior guidance of 8%.

In other words, the company is telling investors to expect lower growth paired with higher costs – the definition of "stagflation." Then, throw in an unreliable supply chain and...

Target's stock plummeted about 25% today after the earnings report...

It closed today at $161.61 per share. It hasn't been that low since November 2020.

The sharp sell-off headlined another day of steep losses for the U.S. indexes, as inflation concerns took center stage again. The tech-heavy Nasdaq Composite Index plunged 4.7%... The S&P 500 Index dropped 4%... and the Dow Jones Industrial Average fell about 3.6%.

An interesting tidbit in Target's earnings report is that foot traffic in its stores and visits to its website actually rose nearly 4% (on top of 17% quarterly growth a year ago). And the company's sales were up more than 3% over the previous quarter.

So even with more people, on balance, frequenting the company's retail outlets in person and online, Target's bottom line took a big hit...

That's because its operating margin took a gut punch from a villain named Mr. Inflation.

Again, it isn't a good indicator for the economy as a whole when a leading retailer with solid brick-and-mortar operations and a reliable online presence (like curbside pickup and a workable app) is facing this grab bag of challenges.

It probably says less about Target's business acumen and more about life in general these days...

Freight costs surprised the company the most. And consumer habits are changing...

Cornell told analysts on Target's earnings call this morning that "transportation and freight costs" surprised the company in the first quarter.

Translation... record-high gas prices.

And yes, those prices are still rising... According to AAA data, they're now above $4 per gallon in all 50 states for the first time ever.

Cornell estimates an additional $1 billion in freight and transportation costs that he didn't expect at the start of the year – or even in March, when the company held an investor day with shareholders and analysts. As he said during the earnings call...

We did not anticipate the rapid shifts we've seen over the last 60 days... that transportation and freight costs would soar the way they have as fuel prices have risen to all-time highs.

In addition to rising gas costs, at least in part tied to the war in Ukraine, Cornell also noted that consumer habits were changing as well (due to the broader presence of inflation)...

People keep spending (a good sign), but they're buying different things – more essentials and less "big ticket" items.

Sales in the food and essentials categories were strong in the first quarter. But Target saw a "rapid slowdown" in apparel and home items sales year over year starting in March, "when we began to annualize the impact of last year's stimulus payments." As Cornell added...

While we anticipated a post-stimulus slowdown in these categories and we expected consumers to refocus their spending away from goods and into services, we didn't anticipate the magnitude of that shift.

Ultimately, that resulted in excess inventory in "bulky" categories – like kitchen appliances, televisions, and outdoor furniture. And the company faces challenges in the second quarter to unload that inventory while getting its hands on in-demand items like luggage and toys. More from Cornell...

That certainly impacted our business in the first quarter and we expect that to continue in [the second quarter].

Cornell said the company has hiked prices in several areas in its stores, too. He mentioned the phrase "rapidly changing environment" more than once. And he said he expected a more "normalized environment in 2023."

Speaking as a longtime New York Jets follower – the oft-embarrassing NFL franchise – that sounds a lot like what fans typically say at the end of (yet another) losing season...

"Better luck next year!"

Are we supposed to think that Target is the only business dealing with these problems?

I'm certainly not thinking that way.

In fact, we don't even need to guess. We can just turn to the nation's largest retailer...

This week, Walmart's first-quarter earnings report mirrored Target's...

As our NewsWire team reported yesterday, Walmart also reported first-quarter earnings below expectations at $1.30 per share (compared with an estimate of $1.48 per share).

The company projected higher sales for the year, but lower profits. And its reasons sound a lot like Target's, as our team wrote...

Management cited the rising costs of goods due to inflation combined with larger inventory and employee pay as the primary drivers for missing Wall Street's expectations by a sizable margin...

Walmart stated the bottom-line disappointment was unexpected. The company blamed the unusual economic environment – specifically higher fuel and food prices.

Walmart CEO Doug McMillon said the results "were unexpected and reflect the unusual environment."

Walmart Chief Financial Officer Brett Biggs also noted changing consumer-spending habits. For example, he said the company's food sales rose in the first quarter. However, as he noted, the operating profit margin is small in the category compared with items like electronics.

After the report, Walmart's shares are down roughly 17% over the past two days. The stock closed today at $122.43 per share – a level last seen in July 2020.

You might be starting to see a pattern here... Valuations across the retail sector are going back two years in time.

Similarly, shares of electronics retailer Best Buy (BBY) and big-box retailer Kohl's (KSS) each fell about 11% today.

Notably, shares of TJX Companies (TJX) – which owns discount retailers TJ Maxx, Marshalls, and HomeGoods – jumped more than 7% after the company beat earnings estimates.

What's next?

At this point, "higher costs – and why they've happened" is a phrase we shouldn't need to repeat.

Frankly, I'm getting tired of rehashing it. So I can imagine you're sick of reading it.

Still, it's important... And the effects are only starting to show up in the economy.

To that point, the thing to keep an eye on over the next several months and beyond is consumer-spending habits...

They're changing already. But we'll want to see if they slow significantly. If so, it could take a bigger bite out of economic growth – and perhaps in unanticipated ways that damage companies in the longer run.

In other words, will the "inflation and slower growth" problem become a "recession" problem?

Frankly, the labels aren't too important. But there's a critical difference between a recession – marked by a period of economic contraction in gross domestic product ("GDP") – and just slower GDP growth than we saw in 2021 (and the second half of 2020).

The Federal Reserve plays a big role in the answer, but so do 'We the People'...

Higher interest rates mean less demand (during a year when growth was already slowing compared with last year). This is already showing up in a big way in the housing market, where mortgage applications are down 11% versus last week alone.

Mr. Market reacted in kind the first couple months of this year to those expectations. Then, earnings season hit and people started digesting what the knock-on effects of the Fed's decisions will mean (and what might happen with the course of inflation).

That happened yesterday and today with reports from retailers like Walmart and Target.

It was the same story with online-retail juggernaut Amazon (AMZN) when it reported first-quarter numbers in late April. After a dismal report, its shares fell 12% in a day.

Together, Walmart and Amazon dominate American retail – in person and online. And because of that, they make for good bellwethers for what's happening in the real world.

Speaking of the real world...

There has been a lot of mainstream talk about how the "consumer" – as if we are all the same person – is in strong financial shape, with cash stockpiles at the ready.

But I'm skeptical...

Last week, JPMorgan Chase (JPM) published a report on rising food and gas prices. The investment firm estimated that since gas prices spiked after the war in Ukraine began, users of Chase credit and debit cards spent nearly $10 billion less per month on non-gas items.

JPMorgan said the data shows that spending falls by 60 cents for each additional $1 of gasoline spending due to higher prices. And as Peter McCrory, an economist at the firm, said...

Despite the buffer of excess savings, elevated gas prices nevertheless appear to be weighing on real consumption.

Of course, higher gas prices don't exist in isolation. As we mentioned yesterday, energy prices touch all kinds of industries. That makes them a good barometer for inflation in general – and the nasty tentacles that reach deep into the economy.

As we've also said here over the past several months, rarely in modern times has the American "consumer" been less optimistic about the economy. That's according to real people who are asked...

We reported last month that wealthier Americans were starting to lose faith...

Now, everyone is.

The latest Surveys of Consumers data from the University of Michigan, which has been running for decades, shows sentiment declined by 9.4% in May. According to survey director Joanne Hsu...

These declines were broad based – for current economic conditions as well as consumer expectations, and visible across income, age, education, geography, and political affiliation – continuing the general downward trend in sentiment over the past year.

It gets worse...

Consumers' "assessment of their current financial situation" relative to a year ago is at its lowest reading since 2013. And 36% of people surveyed say inflation is the reason.

In addition, the buying appetite for durable goods – like cars or refrigerators – is at its lowest level since the survey started asking questions about it in 1978. And again, it's primarily due to high prices.

All in all, these aren't bullish signs...

We know many people have never lived through an era of high inflation. That's why most of the mainstream investment advice you'll see is geared to an era of low inflation, where stocks and bonds generally rose – if not one, then the other.

But that's not the case today.

As we've noted, stocks and bonds are both down for the year, while the value of commodities – tied to the prices of "real" goods – are up... And they're still going higher.

Meanwhile, higher interest rates from the Fed are only starting to eat into economic growth... while inflation has stuck around and at a higher rate than most people hoped it would.

That's another reason why "hope" is not a good investment strategy. Stocks certainly could fall further in the weeks and months ahead... or at least until the world gets a clearer picture on the path of inflation and growth expectations.

If you've raised an appropriate amount of cash, own "hard assets" – like gold or real estate – and hold shares of high-quality businesses that will reward you with dividends or share buybacks even in a down market, you're doing well already...

If you have some commodity exposure, like we wrote about yesterday, that's even better.

But if you believe stocks still have more room to fall, you can do something to prepare...

In the short term, you can place a couple of "short" trades, betting on lower prices (of stocks, not gas). But please, if you're interested in doing that... don't go at it alone, especially if you've never done it before.

Fortunately, we know a guy who can help...

Ten Stock Trader editor Greg Diamond is the best guy to follow right now...

As we mentioned in Monday's Digest, Greg has nailed every leg down of the latest sell-off in stocks. It started last November with his call for the markets to "top" by February or March...

That happened.

And since then, Greg has given his subscribers the potential to make a lot of money in a down market... His win rate this year is nearly 80%. And you could've doubled your money twice in five days earlier this year when the markets sold off dramatically.

Now, he's expecting the same thing to happen again...

We could give you reasons why – the Fed, a bad earnings season continuing, some unexpected event happening in Eastern Europe, a nasty inflation number, you get the idea.

But for no other reason than the price action in stocks so far this year and his technical analysis research around key dates over history, Greg is expecting an "aftershock" to hit the markets within the next two weeks.

In short, he believes the markets could experience a brief rally this week or next. However, if the major indexes don't climb above their March highs... look out below.

But as I said, this is an opportunity for folks who follow his recommendations to make money. And it's a way to hedge against losses you might incur in other parts of your portfolio.

You don't have to bank on "better luck next year." You can take action today.

To get started, check out Greg's latest special briefing. He explains the details... outlines his investment approach... and shares how you can access his research and trades today.

Please note that this is a time-sensitive offer and won't last long... So don't delay.

If stocks crash, you'll be happy you listened...

(And Alliance members, as always, you can find Greg's research in the Ten Stock Trader section of our website. You can find his latest updates here, including instructions today for a bearish trade that he says he might add to later this week.)

The Good, Bad, and Ugly Charts

In the latest episode of Making Money With Matt McCall, Matt looks at a bunch of different charts in the market today. Some are plain ugly to look at. But as he explains, others underscore why now is actually a time to be extremely bullish...

Matt highlights the areas he's paying the most attention to right now – like consumer staples and commodities. And he discusses other opportunities on the horizon...

Click here to watch or listen to this episode right now. And to catch all of Matt's shows and more videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.

New 52-week highs (as of 5/17/22): Bristol-Myers Squibb (BMY), CTS (CTS), ProShares Ultra Oil & Gas Fund (DIG), Shell (SHEL), and Suncor Energy (SU).

In today's mailbag, Crypto Capital editor Eric Wade answers a question about non-fungible tokens ("NFTs") stemming from his May 4 Digest. Do you have a comment or question? As always, we welcome your notes at feedback@stansberryresearch.com.

"I'm all for the idea behind NFTs, but I struggle to see how they will enter the mainstream without significant infrastructure to use them in practical situations. I've read statements like this from Eric in the past...

Those are a couple of examples of the future we're heading toward... Driver's licenses, passports, real estate, concert tickets, and even your favorite wine can all be stored as NFTs representing the ownership of the real physical assets.

"So, how does an NFT driver's license or passport work in the real world? I get pulled over for speeding in my Tesla or I approach the immigration desk returning to the U.S. from Europe – how does the verification process actually work? Can I 'send' my NFT to a third party who could then use it to enter the country illegally? I don't see how an NFT replaces the photo on my physical passport.

"I want to sell a property that I have an NFT [for] proving my ownership – how is that ownership verified? Seems like we'd still need closing agents or title companies to independently conduct a search for a third party vault of some kind – or we'd need a defi app that both parties trust which will facilitate verification. How do we know that someone didn't just get my key and is selling my real estate out from under me?

"For that matter, how do we know that the Vinsent people are not just sourcing wine from a nearby vineyard and branding it as their own, providing a blockchain ID to a case of wine that actually didn't originate with them?

"I'm not negative on the potential of NFTs at all, but I'm curious as to the operating components, beyond the blockchain itself, that need to be in place for real world use cases to function. Apologize if my questions reflect poor understanding of the technology." – Stansberry Alliance member Stephen G.

Eric Wade comment: It's just like when the world converted from coins and bills to digital dollars...

Bank of America (BAC), Visa (V), American Express (AXP), and PayPal (PYPL) all had to build ways to talk to each other, as well as ways to charge a customer and pay a vendor.

Similarly, while you may own a house and have your title "onchain" – meaning blockchain – your first transaction may be the first time a title company has to learn how Etherscan works... We get that.

My bank at one time didn't use e-mail. Now, its phone app transfers money immediately. Building the ability to transfer digital "things" is happening right now.

You have a fair point about knowing whether it's real wine or not just because Vinsent said so. But that question isn't unique to blockchain, is it?

Any vendor or distributor will have that uncertainty. The advantage of Vinsent is fewer middlemen... so there are fewer opportunities to introduce a very old problem (fakes).

If you want to learn more, I'd urge anyone who is interested at all in NFTs to check out my latest presentation. I go through more detail and even share one NFT-based cryptocurrency that's flashing a major buy signal right now. You can get started right here.

All the best,

Corey McLaughlin
Baltimore, Maryland
May 18, 2022