Analysis: DKS WMT

Stocks continue to look for more solid footing with investors parsing through the latest handful of corporate earnings and a modicum of economic data as we wait for Wednesday afternoon's release of the Fed's May monetary policy meeting minutes.

Exiting that meeting, Fed Chair Jerome Powell put forth expectations for additional 50 basis point rate hikes at the central bank's June and July meetings, However, this behind-the-scenes view may offer some clues as to how aggressive the Fed could be after those meetings.

No doubt readers of the Fed minutes, and we include ourselves in that group, will be looking for insight as to what Fed officials could be assessing to gauge success in their inflation fight as well as how much pain is anticipated in the process. The Fed's stated course, paired with learnings from those meeting minutes, will form the backdrop for Friday's release of the April PCE Price Index, a key inflation indicator for the Fed.

As we wait for those meeting minutes and the April Durable Orders report, consumer confidence surveys in Germany and France both came in weaker than expected. This soft data suggest consumer moods are souring amid the drawn-out Russia-Ukraine war that has catapulted food and energy prices higher in Europe. We are likely to see that affect retail sales in the eurozone when those numbers are published on Friday, June 3, and it's another reason to be wary over bloated retail inventories.,

We were reminded of that yet again this morning with quarterly results from Dick's Sporting Goods (DKS) . Dick's reported a 40% year-over-year jump in inventories exiting its April quarter. Like a growing number of other retailers, Dick's inventory level set a record, which adds to our growing concern for retailer margin pressure in the coming quarters.

Adding to that concern, Dick's cited the impact of the "evolving macroeconomic environment" as it cut its full-year same-store sales forecast as well as its EPS outlook for the year. We interpret that to mean the growing headwinds to consumer spending that we've been sharing with members.

Factoring in its April quarter and updated economic forecast, Dick's now sees its same-store sales falling between 2% and 8% year-over-year vs. its prior forecast of flat to -4%. This suggests to us it will have a challenging time working off its quarter-end inventory level, as does the company's EPS guidance reduction to $9.15-$11.70 for the year vs. its prior guidance of $11.70-$13.10.

We see all this as the latest warning in an increasing challenging environment for retailers, especially those with a non-differentiated business model. It also underscores our downgrade of Walmart (WMT) shares to a Three yesterday, and our plan to use near-term strength in WMT to exit that position.

Action Alerts PLUS is long WMT.