US retail earnings disappoint: Wesfarmers sinks to 20 month lows, ASX retail stocks sell off

Wesfarmers (ASX: WES) shares have sunk to near 20-month lows after much weaker-than-expected earnings from US-listed retail peers Target, Walmart and Lowes.

The rest of the S&P/ASX 200 Consumer Discretionary sector isn't faring much better, including names like:

• JB Hi-Fi (ASX: JBH) -6.8%

• Super Retail Group (ASX: SUL) -5.5%

• Harvey Norman (ASX: HVN) -5.1%

• Premier Investments (ASX: PMV) -3.6%

US big retail sinks

Investors have turned to hopes that robust corporate earnings could help weather the broad-based selloff in equity markets.

Unfortunately, once solid corporate earnings are beginning to show cracks. 

Four major US retailers - Walmart, Target, Home Depot and Lowe’s reported March quarter financial results this week, offering key insights as to how businesses and consumers are holding up. 

Target shares plummeted -25% after profits took a larger-than-expected hit due to higher freight costs, higher markdowns and lower-than-expected sales of discretionary items such as TVs and bikes.

CEO Brian Cornell said that “we saw healthy top-line growth in the quarter,” which was accompanied by “unusually high costs.”

Likewise, Walmart revenue was intact but profits were lower-than-expected due to surging fuel prices, elevated labour costs and aggressive inventory levels. The company’s stock is down -17.4% in the last two sessions. 

Lowe’s and Home Depot also fell around -5% on Wednesday, but their earnings have been far more resilient compared to Target and Walmart. 

Implications for ASX retailers

Retailers are facing industry-wide issues, the most notably higher freight and logistics costs.

Target pointed out that profits were hit by inventory arriving too early and too late.

While Walmart said its inventory increased by around 33% as it tried to get ahead of inflation and provide more stock certainty for customers. Though, elevated inventory and higher supply chain costs chipped away at margins.

According to UBS, Walmart and Target buys approximately 26% and 34% of merchandise from China.

If you look at a business like Wesfarmers, CEO Rob Scott says that between 20-70% of products come from China, depending on the category.

It seems like weak US retailer earnings have shocked the market, and local names are currently experiencing a knee-jerk reaction to potential earnings headwinds.

Only time will tell how local retailers have weathered the storm.

Wesfarmers 12-month price chart