Target said it had observed a deterioration in consumer demand ahead of the busy holiday season, triggering a 15 per cent drop in its share price and a sell-off among rival retailers.
The company reported third-quarter results “well below our expectations”, chief executive Brian Cornell said, and issued a weak outlook for the current period as inflation and rising borrowing costs forced consumers to rein in spending and hunt for bargains.
“Spending patterns changed dramatically” at the end of the third quarter, chief growth officer Christina Hennington told analysts on an earnings call on Wednesday, slowing as consumers have limited funds for discretionary purchases such as clothing and housewares, and even some household essentials.
Customers “are feeling increasing levels of stress, driven by persistently high inflation, rapidly rising interest rates and an elevated sense of uncertainty about their economic prospects,” Cornell said during the call.
“Many consumers this year have relied on borrowing or dipping into their savings to manage their weekly budgets,” he continued, but “those options are starting to run out” for some, making them more price sensitive and hesitant to buy full-price items.
The warning extends a string of disappointments for Target, which has cut its profit outlook several times this year. The company has struggled with excess inventory, necessitating discounts to clear it off the shelves that have weighed on margins.
It has also prompted a rapid reassessment of the outlook for the US consumer in a matter of days, with investors scrutinising data on Wednesday showing US retail sales in October had their biggest monthly jump since January, and results on Tuesday from Walmart, the world’s biggest retailer.
Walmart reported better than expected third-quarter results and lifted its earnings guidance for the year, but chief financial officer David Rainey told analysts “the consumer is stressed”.
Minneapolis-based Target lowered its guidance for the fourth quarter, predicting a sales decline in the single-digit range, “based on softening sales and profit trends that emerged late in the third quarter and persisted into November”.
The “rapidly evolving consumer environment” would lead it to act “more conservatively” for the rest of 2022. Target also said on Wednesday that it would implement a cost-cutting plan of $2bn to $3bn over the next three years.
“We’re facing an even higher degree of uncertainty than a quarter ago,” chief financial officer Michael Fiddelke said.
Target shares dropped as much as 16.7 per cent in morning trading in New York to a one-month low. That triggered a sell-off among other retailers, with Macy’s, Best Buy and Costco down 7.9 per cent, 7.3 per cent and 0.6 per cent, respectively. Walmart was up 0.4 per cent, while off-price retailer TJX jumped 3.3 per cent after lifting its full-year outlook on Wednesday.
The combination of bargain-hunting consumers and the need for Target to offer discounts to clear excess inventory could mean continued pressure on its profit margins in the near-term. “We see our guests holding out for and expecting promotions more than ever,” Hennington said.
Target said it now expected a “wide range” for its operating margin rate in the current quarter “centred around” 3 per cent. In March, the company said it expected an operating margin rate of 8 per cent or higher for financial 2022, but it has failed to reach that mark in any of its past three quarters.
Target’s profits fell more than 52 per cent from a year ago to $712mn in the third quarter, while revenue rose 2.4 per cent to $26.5bn. Analysts had expected net income of $971mn on revenue of almost $26bn.
Data on Wednesday showed US retail sales jumped 1.3 per cent in October, the biggest monthly advance since January. Adjusted for inflation, sales volumes rose a more “modest” 0.8 per cent, only the second monthly gain in the past six months, according to EY Parthenon chief economist Gregory Daco.
A resilient US consumer, though, could complicate the Federal Reserve’s efforts to bring inflation under control, meaning it may have to delay any potential near-term plans to slow the pace of interest rate increases.
“We expect inflation-adjusted consumer spending to remain flat in 2023, following a 2.6 per cent advance in 2022. Interest rate-sensitive goods as well as leisure and accommodation services will likely lead the slowdown,” Daco said.
Additional reporting by Peter Wells
Source: Economy - ft.com
