Target shares drop on 4Q caution
Inflation-weary consumers less willing to buy nonessentials
Shares of Target Corp. tumbled 13% on Wednesday after the Minneapolis-based retailer voiced caution about incoming fourth-quarter sales and profit.
Target also said it will be slashing expenses with a goal of saving $2 billion to $3 billion over the next three years, but the cost-cutting will not include layoffs or hiring freezes, executives said.
An unexpected and potentially ominous pullback in customer spending ahead of holiday shopping, the company said, pushed third-quarter profit down 52% after Target was forced to slash prices for Americans feeling the squeeze of inflation.
“In the latter weeks of the quarter, sales and profit trends softened meaningfully, with guests’ shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty,” CEO Brian Cornell said Wednesday in a statement. “This resulted in a thirdquarter profit performance well below our expectations.”
Target’s dour quarter, which ended Oct. 29, arrives amid a backdrop of resiliency from American consumers.
The Commerce Department reported Wednesday that U.S. retail sales rose 1.3% in October from September, up from a flat reading in September from August. Overall, nine of 13 retail categories rose last month, according to the department.
What has become clear is that spending by the American consumer is shifting, with many trading down to cheaper options. That was evident at Walmart Inc., which reported better-thanexpected earnings Tuesday, despite a $1.8 billion quarterly loss tied to a nationwide opi
oid settlement, according to the company.
One factor in the difference: more than 50% of Walmart’s U.S. business comes from groceries; that number is 20% at Target.
Part of the difference with Walmart is likely also caused by Target’s greater reliance on discretionary items. With inflation all around, households take care of needs such as food and shelter first.
“With its exposure to a lot of discretionary spending, Target will feel the chill first, but it will not be the only retailer to catch a cold,” said Neil Saunders, managing director at GlobalData Retail.
Lowe’s Cos. Inc. and Home Depot Inc., for instance, reported higher sales in their third quarter as shoppers kept spending on home projects. T.J. Maxx parent The TJX Cos. Inc. released solid results Wednesday, noting “treasure hunting” for bargains is resonating with customers.
At Target, many customers have begun to lean on credit cards or have dipped into savings to shop, Christina Hennington, the company’s chief growth officer, told analysts Wednesday.
The retailer has built a reputation as being tuned in to fashion and being a place to smartly outfit homes, the discretionary product areas where shoppers are now cutting back.
“It’s an environment where consumers have been stressed,” Target’s Cornell said. “We know they are spending more dollars on food and beverage and household essentials. And as they are shopping for discretionary categories … they are looking for that great deal.”
The disappointing quarter follows Target’s nearly 90% profit slide in the second quarter and a 52% drop in the first.
In early June, Target warned that it was canceling orders from suppliers and aggressively cutting prices because of the lighteningfast shift away from covid-19 pandemic spending on items from TVs and kitchen appliances to dinners out, movies and vacations.
Overall, Target posted quarterly net income of $712 million, or $1.54 per share. That compares with $1.49 billion, or $3.04 per share in the year-ago period. Analysts had expected $2.16 per share in the latest quarter, according to FactSet.
Revenue rose 3.4% to $26.52 billion compared with the year-ago quarter, which edged out Wall Street expectations, according to FactSet. Comparable sales increased 2.7% — those that come from stores and online — atop a 12.7% growth last year.
Cosmetics, food, beverages and household essentials drove sales, offsetting weakness in discretionary items. Target did gain market share across all five of its key merchandise categories based on the number of items sold.
And CEO Cornell said shoppers showed they are ready to spend when it came to such events as Halloween and the back-to-school season.
The quarterly operating income margin rate was 3.9% in 2022, compared with 7.8% in 2021 as markdowns hit profits, on top of rising theft, and merchandise and freight costs.
Target said theft is a growing problem, with the number of thefts rising 50% so far this year.
Because of softening sales and profits toward the end of the reporting period, Target said, the company is planning for a “wide range of sales outcomes in the fourth quarter.”
The company expects a low-single-digit decline for comparable sales for the fourth quarter, with an operating margin rate of around 3%.
Shares of Target Corp. dropped 13% in early trading Wednesday without recovering by the market close at $155.47. Other retailers slid after Target’s earnings report, as well.
Macy’s Inc. and Kohl’s Corp. fell 8% and 7%, respectively. Shares of Walmart Inc. were flat, with Dillard’s Inc. falling 4%.
The disappointing quarter follows Target’s nearly 90% profit slide in the second quarter and a 52% drop in the first.