Retail Stocks Are Falling Despite Blockbuster Profits. Why the Market Doesn’t Trust the Numbers.

Home Depot easily blew past analysts’ expectations, while Walmart saw e-commerce sales nearly double. Even Kohl’s , which operates in the structurally challenged department- store sector, lost much less than expected. Yet Home Depot and Walmart were off 0.9% and 0.5%, respectively, in afternoon trading, while Kohl’s had plunged 15%.

Whether the gains will last may be less of a concern in terms of big tech, given how resilient these companies have been. Yet other areas of the market look more vulnerable, and retailers definitely fall within that group. It’s hard to ignore the worry that sales will slump as Americans tighten their belts.

RBC Capital Markets’ Scot Ciccarelli notes that the “change may give some investors pause as ‘sales sustainability’ is one of today’s key topics in retail.” He highlighted comments from management about normalizing sales trends, which “may suggest that the outsize gains experienced over the last few months may be starting to ebb.” He said RBC remains a fan of Walmart, but that other stocks the firm covers offer a better balance of risks and potential rewards.

Home Depot held on to gains longer Tuesday morning before falling into the red. That’s likely because its results looked even stronger, and the company’s foot traffic has held up relatively well. Data from Placer.ai showed that traffic was up 26% year over year in May, and that June and July visits were up by around 19%. The strength continued into early August.

Given that digital sales jumped 100% and sales trends have held up in recent weeks, that may be more about managing expectations than signaling trouble ahead. Still, costs remain high. The company will have to keep paying for stringent safety protocols even if demand tapers off as colder weather arrives.

Kohl’s will likely continue to struggle. “We think investors are underestimating issue of saturation in the U.S. retail market and, as we learned from '08 Financial Crisis, the retailers most mired in debt and lagging in omnichannel run a real risk of going bust,” writes CFRA analyst Camilla Yanushevsky.

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