While share prices of retailers have been all over the map in 2022, this week's post-earnings plunges in Target and Walmart are highlighting the damage inflation can do to profit margins. Still, the exact influence of inflation on retailers depends on what they sell, who they are selling to and the methods they are using to do so. This influence will change as consumer demand and supply chains adapt.

Among chain stores in the S&P 500, only Dollar Tree (+15%) and Walmart (+2.4%) had positive returns year-to-date before Tuesday. The two worst-performing retailers were ecommerce sites Amazon.com (-34%) and Etsy (-60%).

This rotation by investors generally was based on two themes, the switch from online to bricks-and-mortar retailers due to the continued economic reopening following the waning of Covid-19 cases and the expectation that consumers would shift to lower-priced goods due to high inflation.

New York City raising its Covid-19 alert level to high on Tuesday is a warning that the pandemic (along with online retailing) might not be over yet, while Tuesday's disparate results from the two largest brick-and-mortar retailers in the US, Walmart and Home Depot, are examples of how the effects of inflation are not the same across the board.

Walmart fell 11% Tuesday, the most in 35 years, after it sliced its 2022 outlook due to inflationary pressures. Its first-quarter gross profit rate was 38 basis points lower than the previous year as customers shifted to buying lower-margin groceries.

Target plunged 22% in premarket trading on Wednesday after lowering its operating margin outlook for the full year. Similar to Walmart, the big-box department-store chain saw strong demand for groceries and household essentials at the expense of discretionary categories in the first quarter.

"The Fed is very concerned about your lower and middle income persons who are struggling with higher inflation," Dana Peterson, chief economist at the Conference Board, said in a Bloomberg TV interview Tuesday.

She noted that "in the present situation, people are still pretty optimistic," but are "concerned about the economy in the future as they see higher interest rates and inflation affecting consumption" which "may bleed over into their labor market prospects."

The large retailers themselves are already seeing overstaffing issues, according to Business Insider.

On Tuesday, Federal Reserve Chair Jerome Powell said the Fed will continue to raise rates until there is "clear and convincing" evidence that inflation has abated. Just how severe the effects of inflation have been on lower-income consumers will be further tested next week as Dollar General and Burlington Stores report earnings.

Meanwhile, Home Depot closed higher by 1.7% on Thursday after reporting first-quarter comparable sales that exceeded the average analyst estimate. While customer transactions were down 8.2% year-on-year, the home-improvement retailer more than made up for that with an 11.4% increase in the average ticket.

Price is less of an issue for Home Depot's customers than for Walmart's, which tend to skew toward the lower end of the income distribution. But while the home-improvement retailer's outlook is strong, its sales growth did not outpace inflation.

Competitor Lowe's, which is positioned slightly down the income spectrum and which doesn't have as big of a professional-contractor business as Home Depot, is trading lower in the premarket after reporting worse-than-expected first-quarter comparable store sales.

Bloomberg Intelligence analyst Jennifer Bartashus said in a Bloomberg TV interview Tuesday. Consumers that have the discretionary income to spend are still spending," she said.

noted Bartashus.

Consumers with incomes on the high end of the spectrum are less sensitive to inflation and are ready to spend after being cooped up at home during the various waves of the coronavirus pandemic over the past two years.

"We are expecting a big summer season of vacation," Telsey Advisory Group CEO Dana Telsey said in a Bloomberg TV interview Tuesday. And after Covid-19 delays, there will be 2.6 million weddings with the average attendee spending $430 in 2022, she noted.

Telsey expects "the luxury good universe will do very well," as Asian travelers return to the US once Covid-19 restrictions are lifted.

Two of the largest US luxury-goods manufacturers, Estee Lauder and PVH Corp., are both down about 35% year-to-date due to the lack of a rebound in international tourism.

April US retail sales were better than expected, but overall those sales have failed to keep up with inflation, perhaps one of the reasons the VanEck Retail ETF is down 16.5% year-to-date. Stagflation concerns and negative sentiment led Goldman Sachs strategists to lower their short-term outlook for global equities Tuesday.