December 3, 2022

Target returns a mile away amid ‘significant change in consumer shopping patterns’

Target missed the bullseye by a wide margin in the third quarter as the discount retailer felt a slowdown in consumer spending on high-end items.

“In the final weeks of the quarter, sales and profit trends softened meaningfully as guests’ shopping behavior was increasingly impacted by inflation, interest rates and economic uncertainty,” Target president and CEO Brian Cornell said in the earnings release. Third quarter earnings performance fell short of our expectations.

Shares of the target fell more than 10% in premarket trading. Shares of the retailer are down 22% year to date, compared with a 16% drop for the S&P 500.

In a call with reporters, Cornell said a more cautious approach to holiday season expectations is warranted given current business trends.

“If you sit here today and look at some of the syndicated data that’s been released, you’ve seen a significant change in consumer shopping patterns as you go through October and into November,” he said. “Clearly, it’s an environment where consumers are stressed. We know they’re spending more dollars on food and beverage and home essentials. They’re looking for promotions and looking for that great deal. And I expect that ad focus to continue throughout the holidays.”

The Target logo is seen on shopping carts at a Target store in Manhattan, New York City, USA on November 22, 2021. REUTERS/Andrew Kelly

Here are some highlights from Target’s third quarter earnings:

  • Operating profit margin was 3.9%, missing estimates of 5.35%. The company says margins were “well below” expectations.

  • Inventory summary, often run “Organized retail crime,” has cut the retailer’s gross margin by $400 million so far in 2022.

  • Comparable sales rose 2.7%, slightly ahead of estimates for 2.51% growth.

  • “Continued Tenderness” is mentioned in the preferred merchandise categories.

  • Inventory grew 14.4% year-over-year, cooling from a 2Q growth rate of 36%.

  • Adjusted EPS came in at $1.54, just shy of analyst estimates of $2.17.

  • Guidance for top and bottom lines was cut in the fourth quarter.

  • “Smooth” traffic trends are called for in November.

  • A new three-year spending cut effort of $2 billion to $3 billion was announced.

Many analysts on Wall Street were bracing for a weak quarter and Target’s 4Q guidance, one of them being Citi retail analyst Paul Lejuez.

“We believe the top-line remains healthy overall, with continued strong spending at the upper end of Target’s income demographic,” Lejuez said in a note ahead of the results. “Based on our conversations with the retail industry and Target management, we don’t believe most companies (including Target) are cutting customers. Overall, lower-income consumers continue to prioritize consumables over discretionary items. This has a negative margin impact for Target.”

The analyst added that Citigroup “considers management’s guidance for 4Q to be very promising.”

Brian Sozzi A great teacher and Presenter at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi And on LinkedIn.

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