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Why retail stocks look terrifying: Morning Brief

This is The Takeaway from today's Morning Brief, which you can receive in your inbox every Monday to Friday by 6:30 a.m. ET along with:

  • The chart of the day

  • What we're watching

  • What we're reading

  • Economic data releases and earnings

The world is full of scary things. Giant snakes. Sharks. Clowns. Piano recitals. And right now, putting your money into retail stocks.

Okay, investing in retail stocks might not be as scary as a piano recital, but you see the picture I'm trying to paint. And that scariness is because of what we're hearing from some prominent names in the retail space that have reported earnings this week: Home Depot (HD), TJX Companies (TJX), Walmart (WMT), and Target (TGT). Let's break it down.

Walmart had an impressive quarter against the backdrop of a barely growing economy. But the company is still seeing double-digit percentage inflation on food and other consumable goods, and price-sensitive Walmart shoppers are both buying fewer units and going for the generic private label products over the name-brand stuff.

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The pressure consumers feel they are facing is in turn putting pressure on sales. As the first quarter progressed and sales growth moderated sharply, company execs issued a warning for second quarter earnings.

"We're seeing trade downs in terms of buying less expensive meats, or instead of buying a pack of 12, they're buying a pack of 6. You can see that their wallets are being stretched more thinly," Walmart's well-regarded CFO John David Rainey said.

Rainey said on Yahoo! Finance Live (above video) he is also seeing organized retail crime in his stores, in part because of challenging economic conditions.

Down and to the right is not a good trend for a chart that measures retail sales.
Down and to the right is not a good trend for a chart that measures retail sales. (Bank of America)

And then there was the news from Target.

The slightly more upscale (but still discount) retailer also came out with underwhelming second quarter guidance, and also cited a more cautious shopper.

Target's customers aren't shopping the home goods department, but are instead buying a few groceries and heading home because they're cutting costs.

And to make matters worse, Target's CEO said its customers aren't shopping online. Online sales fell for the second straight quarter.

I see more of the same coming from Best Buy's first quarter and outlook next week. Citi seems to agree with ole' Sozz — it slapped the stock with a sell rating (also scary) into earnings with its analysts expecting a bad quarter and outlook.

Meanwhile, Home Depot slashed its full-year sales outlook. Why? Interest rates have gone way up, causing homeowners to rethink putting a $50,000 kitchen remodel on a credit card or taking out a loan.

TJX Companies — the owner of HomeGoods and Marshalls — had a dreadful sales print at HomeGoods in the first quarter. The company's CEO tried to blow smoke in the face of investors on the earnings call about how HomeGoods was turning the corner.

Yeah, and I still have a full head of hair.

But you shouldn't be surprised that retailers are saying this stuff. The biggest economic concern among consumers today is inflation, according to a recent Gallup poll. About 83% of those polled think the economy is "only fair."

Awful.

To that end, it's hard to like the short-term outlook for any retail stocks.

Some names such as Macy's have tanked this year as investors price in a stretch of sales and profit weakness. But the commentary is so meh from retailers right now you have to wonder if the entire space is poised to get much cheaper.

It has to — the charts and valuations aren't scary-low enough given the funk many households are in.

Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on the banking crisis? Email brian.sozzi@yahoofinance.com

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