Target’s profits tumble again, casting a shadow over the holidays

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Dive Brief:

• Target managed comparable sales growth of 2.7% in the third quarter, on top of 12.7% growth last year and a difficult selling environment for retail.
• The retailer’s operating profits, on the other hand, came down by roughly half from last year, and net profits were down by more than 50%.
• While Target’s sales beat, its earnings came in below analyst expectations. As it has multiple times this year, the retailer tightened its outlook for the year, now expecting a Q4 operating margin rate centered around 3% after previously estimating a margin in the 6% range for the back half of the year.

Dive Insight:

On Target’s earnings call with analysts, the overriding theme was the state of the consumer, as it has been on Target’s previous calls, with many households struggling to manage rising interest rates and prices on essential goods.

The sales trends on discretionary categories decelerated in October and into November, casting a pall over the holiday season and prompting Target to rethink its expectations for the season. Target Chief Growth Officer Christina Hennington said on the call that that inflationary food prices have absorbed more customer spending and are crowding out other purchases. Consumers have responded in part by buying essential items in bulk when on sale.

As a result of spending changes, Target’s hard-line sales have fallen by mid-single digits, with electronics and sporting goods dragging down the total, according to Hennington. Toy sales also decelerated in Q3, especially in October, a trend that Hennington said the company will “continue to monitor closely as we move through the holiday season.”

Target CEO Brian Cornell noted that the retailer has seen its customers become increasingly cautious, price sensitive and driven by promotions on products to induce them to buy, which has put continuous pressure on the company’s margins. 

That may be of outsized importance at Target, which relies heavily on discretionary purchases in categories like apparel and home goods, two categories that have largely slowed down across the industry since the spring. 

Walmart, by comparison, blew past analyst expectations with 8.2% comp growth in its U.S. business and has actually revised up its forecasting on operating income for the year since its last guidance.

With another quarter of disappointing numbers, analysts had some hard words for the retailer. Neil Saunders, managing director with GlobalData, pointed to bright spots at Target like beauty, food, household essentials and its private brands. But Saunders also said in emailed comments that “Target has done itself no favors in some categories, including home and apparel, where assortments have become a little bland and merchandising has become increasingly messy.”

Saunders added, “In this kind of economic environment, it takes a lot more effort to persuade consumers to buy and our general impression is that Target has let its standards slip and its energy slide.”

Analysts at Telsey Advisory Group noted the contrast between Target’s performance and that of Walmart, and said that “[w]e are disappointed with Target’s 3Q22 results and 4Q22 outlook, although we understand it is largely impacted by the macro trends.”

And Bill Kirk, a managing director with MKM Partners, said in a research note that Target’s Q3 brought “yet another margin letdown, this time for what is normally Target’s largest, most profitable quarter.” Kirk also noted that Target’s miss follows the retailer’s dramatic actions earlier this year to clear out excess inventory and roll back its orders for the latter part of 2022.

Target announced Wednesday that it was “undertaking an enterprise-wide effort to simplify and gain efficiencies across its business.” The results of the largely unspecified adjustments and cuts could be $2 billion to $3 billion saved over the next three years, some of which will be reinvested back into the retailer to drive its growth goals, according to the company.