Discount Retailers Can’t Escape Inflation
Rising Costs May Eat Away at Profits for Walmart and Target
Retailers Walmart (WMT) and Target (TGT) have seen early holiday sales surge as consumers begin to stock up on presents. But unlike some of their high-end retail competitors and manufacturers, the discount store operators may not see the same uptick in profits. Higher costs for wages, warehousing, and shipping could put a dent in the holiday shopping season, reducing Walmart and Target’s profit margins.
This is something investors will hear more about with Walmart’s earning report this morning and Target’s tomorrow. Wall Street expects operating expenses to increase about 10% for Target and close to 4% for Walmart.
Amazon Already Set the Stage
Rising costs should not come as too much of a surprise for Wall Street, given that Amazon (AMZN) set the stage when it reported quarterly earnings in late October. The ecommerce giant forecast costs to be about $4 billion in the holiday quarter. Those costs will take a significant chunk out of its profits.
Retailers are facing skyrocketing costs, particularly for warehousing. Costs for warehousing are projected to increase between 18% and 19% in 2021. Meanwhile, rent expenses at Walmart are expected to hit $3.28 billion this year—up 7% year-over-year. Costs for insurance, freight, logistics, and wages are also rising at record rates and pressuring profit margins.
Walmart Should Still Be a Winner
Although Walmart and Target may not make as much profit as they hoped during the holiday season, they will still benefit. They will likely have an easier time than smaller rivals which don’t have as much control over the supply chain.
Walmart, and to a lesser extent Target, have a bigger and more efficient supply chain which will help ensure that they have enough holiday goods this season. That will alleviate some of the pressures from rising costs. After all, consumers in the US are still expected to spend $859 billion on holiday gifts this season, which is up 10.5% from last year.
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