Walmart, Target results will tell how gloomy holidays could get for retailers

Walmart and Target results this week are likely to show that major retailers are heading for a turbulent holiday season as rampant inflation has made everything from toothpaste to Christmas sweaters more expensive for shoppers.

Wall Street is betting the retail bellwethers will predict a season of profit-squeezing promotions and discounts as they seek to reduce stocks of clothing and electronics that have built up with consumers cutting back on discretionary spending.

"We have our expectations set really low, it's a difficult environment," said Bill Smead, chief investment officer of Smead Capital Management, which owns Target shares worth more than $200 million.

Smead said recent warnings around demand from Fedex and Amazon did not bode well for retailers this season.

The context

U.S. consumer prices rose less than expected in October, but the fight against inflation is far from over with consumer sentiment still in the doldrums and unemployment rising.

The economic slowdown has led to expectations of a more muted holiday shopping season with everyone from Amazon to Walmart kick-starting holiday deals early to clear excess merchandise.

Analysts at Evercore ISI said Target would likely have more clearance activity in the fourth quarter due to its reliance on discretionary goods and a need to clear an inventory built up over more than six months.

However, Walmart and Target's scale and ability to undercut smaller retailers on price may still help them fare better than others as they attract more cost-conscious consumers looking to do their Christmas shopping on a budget, analysts said.