Why Target and Lowe’s Cast a Shadow Over the Consumer Economy Wednesday

Stock markets moved sharply higher on Tuesday, but they weren’t able to sustain that upward momentum heading into Wednesday morning’s trading. Premarket measures of the market indicated the likelihood of a lower open when the regular session starts. As of 8:45 a.m. ET, futures on the Dow Jones Industrial Average (^DJI -2.64%) were down 163 points to 32,418. S&P 500 (^GSPC -3.13%) futures had dropped 29 points to 4,056, while Nasdaq Composite (^IXIC -3.74%) futures were lower by 132 points to 12,429.

Earnings week for big-box retail giants continued on Wednesday, and the news was generally poor. Target (TGT -25.62%) delivered the most uncomfortable surprise for shareholders, but home improvement company Lowe’s (LOW -6.13%) wasn’t able to provide much reassurance. Read on for the details and what it could mean for the consumer economy more broadly.

Missing the Target

Shares of Target plunged almost 25% in premarket trading on Wednesday morning. The department store retailer wasn’t able to sustain its success from last year, and investors were surprised at just how much its bottom line shrank.

Image source: Getty Images.

Target’s first-quarter numbers weren’t all that pretty. Total revenue came in at $25.2 billion, up 4% year over year on a 3.3% rise in comparable sales. Comps growth slowed to a crawl compared to the nearly 23% rise last year, which reflected the environment during the worst of the pandemic. Even worse, adjusted earnings of $2.19 per share were not only down more than 40% from year-ago levels, but came in below what most of those following the stock had anticipated.

CEO Brian Cornell noted that traffic levels for Target remained robust, highlighting what he called its “broad and affordable product assortment” as being attractive in inflationary times. However, the CEO cited unexpectedly high costs that weighed on profits, and he reasserted Target’s long-term goal of mid-single-digit percentage revenue growth.

Target’s guidance reflected a lot of uncertainty, and while it still expects low- to mid-single-digit percentage sales growth for 2022, investors didn’t like what they’re seeing on the profit side of the business. Until adverse conditions reverse, Target could have trouble bouncing back.

Lowe’s can’t move higher

Declines for Lowe’s were much less extreme, but the stock still fell 4% in premarket trading. The home improvement retailer’s first-quarter results managed to stick closer to what investors were expecting, but they still didn’t like the impact the weather had on what traditionally has been an important season for the business.

Lowe’s reported mixed results in its quarterly report. Total sales of $23.7 billion were down 3% year over year, with comparable sales falling 4%. Although revenue from its Pro contractor customers increased 20%, comps for the U.S. home improvement business were down 3.8%. Net income inched higher by about 0.5% to $2.33 billion, although a big drop in outstanding shares due to stock buybacks pushed earnings up 9% on a per-share basis to $3.51.

CEO Marvin Ellison blamed the weather for much of the shortfall. He noted that cooler spring temperatures deterred many do-it-yourself customers from taking on projects, pointing out that sales trends improved in May after the end of the quarter as the weather warmed. Meanwhile, Ellison called out company initiatives to keep operating margin higher, and Lowe’s still sees the business generating revenue of $97 billion to $99 billion and earnings of $13.10 to $13.60 per share.

A lot of the stock market’s fortunes rest on consumers being able and willing to keep spending. If some of these disappointing numbers don’t turn out to be one-time blips, then the retail industry could do real damage to the broader economy and the stock market in 2022.