Walmart and Target could take a big profit hit as they aggressively discount to become “guest-relevant”

Earnings in Aisle 5... America's favorite retailers are expected to report this week, and it’s looking like a rough quarter for Walmart and Target. High food and gas prices are causing Americans to cut back on discretionary splurges (think: TVs, bikes, air fryers). Now retailers have billions’ worth of unsold inventory (picture: a mountain of hoodies).

• Walmart cut its annual profit forecast in July and laid off hundreds of corporate workers this month. America's largest retailer missed profit expectations in Q1 as inventory surged 33% from last year. This latest quarter could be worse.
• Target issued a profit warning in June, saying earnings would take a short-term hit as it cancels orders and slashes prices to get rid of inventory. In Q1, Target shocked investors with a big profit miss as consumers scaled back on pricier items.

Ignoring the decorative pillows... and turning your back on the pajama rack. Like Target, Walmart’s been on a discounting binge to unload stuff like sweatsuits, patio furniture, and blenders. Those were hot commodities mid-pandemic, but consumers are shunning them now:

• Clothes down, food up: The pace of inflation slowed last month, but grocery prices continued rising from June, and consumer confidence hit another low in July.
• Not saved by the bell pepper: Groceries account for over half of Walmart’s sales (and a good chunk of Target’s) but they’re less profitable than apparel and electronics.