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By Tae Kim 

Amazon.com shareholders just got another reality check from Walmart and Target.

The surprising inability of two major U.S. retailers to contain inflationary pressures -- along with rising evidence of weakening shopping behavior -- mean that Amazon's (ticker: AMZN) road to e-commerce business recovery may have become more difficult.

On Tuesday, Walmart shares $(WMT)$ had their worst single-day decline since October 1987 after it reported earnings. A day later Target stock ( TGT) followed suit by falling 26% after its results -- also tracking to its biggest drop since 1987.

The disappointing quarterly numbers stunned investors, with both companies revealing plunging profitability, soaring inventories, and an increase in markdowns. Walmart and Target were also uncertain on when rising inflation for goods, energy, and their supply chains would end.

Beyond the numbers, there were ominous signs for the state of the consumer and how pocketbooks were getting squeezed -- especially for working-class families. Walmart said it saw shoppers switching from buying gallons of milk to half-gallons and from brand names to cheaper private-label products. Walmart CEO Doug McMillon said food inflation was growing at double-digit rates, and he was worried it would continue to increase.

And then there is the spending shift toward services. Target said shoppers were refocusing purchases away from larger physical items like appliances and televisions toward "going out" experiences such as restaurant gift cards. It could mean consumers have already pulled forward much of their spending on electronics, home goods, and furniture during the pandemic. As most of these items don't need to be upgraded or replaced for years, it could lead to continued sluggish sales.

All this bodes poorly for Amazon. Like Walmart and Target, the technology giant remains vulnerable to the constraints of the physical world. With its 1.6 million global employees, its operations require massive scale. So it will be among the most affected by continued inflationary pressures from wages and fulfillment costs to shipping. And if consumers are going to spend less on physical goods, Amazon's revenue will suffer.

Amazon shares were down 7.6%, to $2,131.65, in recent trading, as the market digested the results.

Of course, inflation and overcapacity were mentioned during Amazon's disappointing earnings report last month. The issues aren't entirely new. But the retailer's numbers reveal things may be worsening at a rapid pace. Target management said it didn't anticipate how quickly the inflationary environment deteriorated over the past two months.

Amazon didn't immediately respond to a request for comment about the implications for the company off Walmart's and Target's reports.

Late last month, Amazon founder Jeff Bezos warned that when the "bull run" in technology ends, "the lessons can be painful." At the time, it was refreshing to hear Bezos talk frankly, cautioning technology entrepreneurs to get prepared for darker times ahead.

But now, it seems he may have been talking about the company he founded too.

Write to Tae Kim at tae.kim@barrons.com

$(END)$ Dow Jones Newswires

May 18, 2022 15:24 ET (19:24 GMT)

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