Loss of profit target a mile amid ‘significant change in consumer shopping patterns’

Target missed the target point by a wide margin in the third quarter as the discount retailer felt the brunt of slowing consumer spending in more discretionary goods.

“In the final weeks of the quarter, sales and earnings trends eased significantly, as guests’ shopping behavior was increasingly impacted by inflation, rising interest rates and economic uncertainty,” Chairman and CEO Brian Cornell said in the earnings release. Third quarter earnings performance is well below our expectations.

Target stock is down more than 10% in pre-market trading. Shares of the retailer are down 22% year-to-date compared to a 16% decline for the S&P 500.

On a call with reporters, Cornell added that a more cautious approach to the holiday season outlook is needed given current trends in the business.

“Sitting here today, if you look at some of the aggregate data that’s been released, you obviously saw a huge change in consumer shopping patterns as we ended October and moved into November,” he said. “Obviously, it’s an environment where consumers are stressed. We know they’re spending more dollars on food and beverages and household essentials. They’re looking for promotions and looking for that great deal. And I expect that that promotional focus will continue throughout the holidays.”

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

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

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

  • Inventory shrinkage, mostly driven byOrganized retail crimeReducing the retailer’s gross margin by $400 million so far in 2022.

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

  • “Continuous Smoothness” is notable for the discretionary merchandise categories.

  • Inventory was up 14.4% year-over-year, lowering Q2’s 36% growth rate.

  • Adjusted earnings per share came in at $1.54, missing analyst estimates of $2.17.

  • Routing for the top and bottom lines was lowered for the fourth quarter.

  • November ‘soft’ traffic trends have been announced.

  • Announcing a new cost-cutting initiative of between $2 and $3 billion for three years.

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Several Wall Street analysts were bracing for a weak quarter and a clue to Target’s fourth quarter, one of them being Citi retail analyst Paul Lejuez.

“We believe overall net income remains healthy, with strong spending continuing at the higher end of the income demographic for Target,” Legouise said in a note ahead of the results. “Based on our conversations across the retail sector and with Target management, however, we don’t think most companies (including Target) have seen a decline in customer volume just yet. Overall, the low-income consumer continues to struggle with prioritizing consumables over Discretionary items, which have a negative marginal effect on the target.”

The analyst added that the Citi team “views management’s guidance for the fourth quarter as very optimistic.”

Brian Suzy It is a comprehensive editor and Anchor at Yahoo Finance. Follow Suzy on Twitter @employee and on linkedin.

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