Expect retail earnings from companies such as Walmart, Target to miss the mark, Morgan Stanley says

Published Wed, Aug 10 202210:55 AM EDT

A slew of retail companies including Walmart, Home Depot and Lowe's post quarterly results next week, and Morgan Stanley is bracing for some rough reports. Analysts at the bank are anticipating multiple earnings misses and for retailers to continue slashing yearly outlooks as high inflation, global economic uncertainty and supply chain issues continue to hit consumers and companies alike. "After a decent start to 2Q22 in May, we have observed store traffic, consumer spending, & broader macro deceleration," wrote Kimberly Greenberger in an Aug. 5 note. "This suggests suggest retailers' June/July sales growth deteriorated from the May trend, & thus 2Q22 revenue could miss to the downside." Earnings misses expected In addition, retailers have likely had to discount slow-moving inventory, weighing on gross margins, and have experienced added pressure on wages and other costs due to inflation. Given this backdrop, Greenberger expects weaker-than-expected earnings from companies across the board. "Heading into '22, a common refrain from companies in our coverage was an expectation to hold COVID driven sales/margin gains with EPS rebasing at structurally higher levels," Simeon Gutman wrote in a Monday note. "Yet as Q2 Mega Cap earnings approach, about half the companies in our coverage have already lowered their '22 outlooks. It almost seems inevitable more negative revisions are coming." The good news, according to the analysts, is that declines in stock prices of many retailers ahead of their earnings releases reflect some of the headwinds that these companies have faced in the last quarter. Morgan Stanley's covered soft lines stocks fell an additional 10% in the second quarter after slipping 21% in the first quarter. Outlooks top of mind Still, investors will likely be sensitive to company announcements about their full-year outlooks and the plans that they give for how they'll manage inventory going forward. Investors will also be listening closely to what retailers say about discounting going forward, as well as the consumer trends they've been seeing. These could be big headwinds in the second half of the year, adding to the pressures retailers have been facing in the first two quarters, Gutman wrote. "Few companies will be immune from all these factors," he said. Morgan Stanley is bracing for potential downward guidance revisions from many companies including Walmart, Lowe's and Target. Walmart alread y cut its quarterly and full-year guidance last month . Target and Lowe's are set to report earnings Wednesday. Walmart's numbers are slated for release Tuesday.