Earnings results from Target (TGT) and Walmart (WMT) show how retailers are feeling the sting of inflation and supply chain issues.
“It’s a horribly challenging environment,” Stephen Lamar, CEO of the American Apparel and Footwear Association, an industry trade group, told Yahoo Finance (video above). “The supply chain complications are extraordinary. On top of that, there’s inflationary pressures really coming from everywhere. It’s materials, labor, freight, energy.”
Both Target and Walmart reported earnings misses this week as higher costs ate into the retailers’ profit margins and discretionary spending decreased. On top of escalating expenses for things like labor and fuel, both retailers were caught off guard and were carrying higher levels of inventory than usual.
By the end of the first quarter, Walmart’s inventory was at $61.2 billion, about a third higher than a year ago, while Target’s inventory surged 8.5% from the previous quarter and 43% from a year earlier.
The current problems are rooted in the supply-chain bottlenecks retailers faced last year, which left them scrambling to secure goods.
“There’s a lot of inventory builds,” Lamar explained. “And that was actually a strategy that companies use to manage last year’s supply chain crisis, where they couldn’t get goods in. … Now, in effort to kind of mitigate that, people shipped early. They shipped in larger amounts. And what that’s happening now is those goods are arriving just in time for these inflationary pressures that have been building up to be passed along.”
All things considered, it’s now unclear how retailers will be able to unload stockpiled goods while prices remain elevated.
“We could see that result in lower consumer demand,” Lamar said of the current environment. “We could see that result in some discounting. But it points to the need for the administration to do action now to get some of these inflationary pressures under control.”
April inflation data showed that prices had risen 8.3% year over year. After removing volatile categories like food and energy prices, the core CPI (consumer price index) rose 6.2% year over year.
“It’s no surprise that we’re seeing all of those costs translating to higher prices when you see the inflation numbers coming out apparel, footwear, basic necessities,” Lamar said. “We’re seeing prices rise to levels we haven’t seen in a long time. Baby clothing, for example, almost 9%… that’s really new numbers that we haven’t seen in quite some time.”
One potential solution, according to the American Apparel and Footwear Association, is taking a look at lifting tariffs that were imposed during the Trump administration or before.
“We think tariff relief is the first, best, easiest way to remove some of that pricing pressure out of these supply chains out of the equation,” he said. “So that can be quickly translated back to lower prices for consumers.”
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter: @daniromerotv
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