Retail companies feeling the sting of inflation, supply chain issues

The retailers are feeling the sting of inflation and supply chain issues, according to Earnings from Target TGT and Walmart WMT.

It's a very challenging environment, according to Stephen Lamar, CEO of the American Apparel and Footwear Association. Industry trade group, told Yahoo Finance that supply chain complications are extraordinary. There are inflationary pressures that are really coming from all over the place. It's materials, labor, freight, energy. Both Target and Walmart reported earnings misses this week, as higher costs ate into the retailers' profit margins and discretionary spending decreased. On top of escalating expenses for things like labor and fuel, both retailers were caught off guard and were carrying higher levels of inventory than usual.

Walmart's inventory was $61.2 billion at the end of the first quarter, a third higher than a year ago, while Target's inventory surged 8.5% from the previous quarter and 43% from a year ago.

The supply-chain bottlenecks retailers faced last year, which left them scrambling to secure goods.

There are a lot of inventory builds, according to Lamar. That was a strategy that companies used to manage last year's supply chain crisis, where they couldn't get goods in. People sent early to try to mitigate that, in an effort to sort of mitigate that. They shipped larger amounts. The goods are arriving just in time for the inflationary pressures that have been building up to be passed along, and that's what's happening now. It is now unclear how retailers will be able to unload stockpiled goods while prices remain elevated.

The consumer demand could be lower as a result of the current environment, said Lamar. We could see that result in some discounting. It points out that there needs to be action taken by the administration to get some of these inflationary pressures under control. The April inflation data showed that prices had risen 8.3% year over year. The core CPI consumer price index rose 6.2% over the last year after removing volatile categories like food and energy prices.

It's no surprise that all of the costs are translating to higher prices when you see the inflation numbers coming out clothing, footwear, basic necessities, according to Lamar. We're seeing prices go up to levels we haven't seen in a long time. Baby clothing, for example, was almost 9%. We haven't seen that in quite some time, so that's a new number. According to the American Apparel and Footwear Association, there is a possibility of lifting tariffs that were imposed during the Trump administration or before.

He said that tariff relief is the easiest way to remove some of the pricing pressure out of supply chains. That can be quickly translated back to lower prices for consumers.