• Stocks collapsed on disappointing earnings from Target (TGT) and Walmart (WMT)
• Retailing is returning to a pre-pandemic normal
• All eyes are now on Costco Wholesale (COST)

The bear market took another leg down after mega-retailers Walmart (NYSE:WMT) and Target (NYSE:TGT) stock reported April earnings.

Even mighty Costco Wholesale (NASDAQ:COST), which reports May 26, fell over 12% in sympathy with Target’s numbers and guidance, which forecast operating margins of 5.3%.

TGT stock had net income of $1 billion, $2.16 per share fully diluted, on revenue of $25.2 billion. The revenue figure was up 4% from last year, but income was down 48%, which was blamed on inflation. The rout had begun with Walmart, which reported net income of $2 billion, 74 cents/share fully diluted, on revenue of $141.6 billion.  Walmart net income was down 24% while revenue was up 2.4%.

Fears of inflation and a slowing economy took down not just the retailers, but the whole market. The NASDAQ fell 5% and the Dow 4% in one day.

Is It That Bad?

Bargain hunters should know that TGT stock now sells for just 11.5 times trailing year earnings, after analysts saw first quarter earnings cut in half. Before the announcement Target had managed to double its value over the previous two years. The rout took its two-year gain to 37%, which is in line with the broader market.

You can moan about the market all day, but Target is still well above its pre-pandemic high of $130/share, opening May 19 at about $160. Walmart is also well above its pre-pandemic high of $120, opening at $148.

This is true for the broader market as well. The Dow is up 10% from its pre-pandemic heights, and the NASDAQ is up nearly 20% from its pre-COVID level. It’s a giant re-set to the before times. If you’ve been dying to party it’s great, but if you’re looking at your retirement account it feels miserable.

Target was a huge pandemic-era winner, thanks to plans laid by CEO Brian Cornell years before. Cornell made Target essential by beefing up its food section, then launching same day delivery.  This was on top of his pre-pandemic innovations, like store brands with name brand quality  that meant increased profits.

The Great Reset

The question for investors should be the value of all this in the great reset to a pre-pandemic economy. The supply chain problems that bedeviled big retail as the economy came back seem over. Target and Walmart both managed to fill their stores with goods but consumers didn’t buy as much as anticipated.

What the pandemic has removed is the ability of merchants to anticipate consumer trends and plan their response. If that ability returns with the pandemic’s end, retailing should return to its long-term trend, a gently-rising slope where stores compete with one another, not their supply chains and distribution systems.

The question becomes how much of that pandemic-era innovation will be permanent. What will be the balance between online and offline retailing? How much product will people consume, and how much quality will they demand? The good news is these are familiar questions. The bad news is the answers are unknown.

The Bottom Line

Attention now turns to Costco, where the official earnings estimate is for $3.05/share of earnings on $51.76 billion of revenue.

By shaving 12% off its market capitalization in a day’s trading, investors have already anticipated a big disappointment. But Costco has already reported its April sales figures, net sales of $17.33 billion up 14% from last year.  The question will be how much of that gain was inflation, and how much profit?

Before the pandemic, Costco earnings tracked its membership fees, but in the last quarter they were 30% higher than that.  Having already been put into the penalty box, while having reported top-line results, there seems just one answer for retail investors.

Buy Costco.

On the date of publication, Dana Blankenhorn owned no shares in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.