Target (TGT) 3Q earnings

A sign outside a Target department store on June 7, 2022 in Miami, Florida. Target announced it expects earnings to take a hit in the near term as it flags unwanted items, cancels orders and takes aggressive steps to get rid of extra inventory.

Joe Raedle | Getty Images

Target‘s profits fell by about 50% when it was finished junk inventory and sales slowed towards the holiday season, prompting the company to lower its expectations for the most important time of the year for retailers.

The company also said Wednesday it plans to save up to $3 billion in total costs over the next three years, citing a need to become more efficient after two years of dramatic sales gains.. The company’s sales have grown about 40% during the pandemic.

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Target did not specify how it will meet its savings target, but said it has no plans for layoffs or a hiring freeze.

Here’s how Target did for the three-month period ending Oct. 29, compared to Refinitiv’s consensus estimates:

  • Earnings per share: $1.54 versus $2.13 expected
  • Revenue: $26.52 billion versus $26.38 billion expected

Shares fell nearly 14% in premarket trading. The stock closed about 4% higher on Tuesday after rival walmart posted a positive earnings report. Target’s shares are down more than 22% this year and its market value is about $83.38 billion.

Target saw sales drop as families struggled with higher prices, forcing trade-offs between what they need and what they want — a potential warning sign for the holiday shopping season. Target Chief Growth Officer Christina Hennington said customer price sensitivity increased during the last two weeks of October.

“It was a precipitous drop and, frankly, we saw those trends in early November as well,” she said during a phone call with reporters.

The inflation factor

Target echoed many of the same themes as its competitor, Walmart, which reported earnings on Tuesday. Consumers are feeling tense due to higher prices of groceries, housing and other necessities. They buy fewer full-priced items and wait for promotions instead. To stretch their money, they opt for smaller items, discount packages or the retailers’ own, cheaper brands.

People are also spending less on discretionary goods. Walmart also spoke on Tuesday of a pullback in spending on clothing, electronics and similar items. But the discounter exceeded Wall Street’s expectations as it attracted customers with its low-priced groceries.

Big bargains have returned to retail after years of lower inventories and out-of-stocks, a dynamic that is also hitting corporate earnings, including Target. The company said Wednesday it now plans for a weaker holiday quarter. It expects a low-single-digit drop in comparable store sales over the three-month period and an operating margin of about 3%.

Target gave no outlook after the holiday quarter, but said it expects difficult conditions to continue.

“Looking ahead, we expect the challenging environment to continue beyond the holiday season and into 2023,” CFO Michael Fiddelke said on a phone call with reporters.

The retailer made progress in clearing much of its excess merchandise. Inventory was up about 14% year over year, compared to 36% in the second quarter and 43% in the first quarter. But throwing those goods away hurt profits. Target’s third-quarter net income fell by about half — to $712 million, or $1.54 per share, from $1.49 billion, or $3.04 per share, a year earlier.

It also missed its target of healthier operating margins in the second half of the year. It had promised an operating margin of about 6% when it lowered its earnings outlook for the second time. In the third quarter, the operating margin was 3.9%.

Target had higher-than-expected price cuts, especially in the closing weeks of the quarter, Fiddelke said. It also spent more to manage inventory that came in early as supply chain backlogs narrowed, he said.

He also said Target is seeing a higher level of shoplifting – which is up about 50% year over year. So far this fiscal year, those losses have impacted Target’s operating margin by more than $400 million. Most of that comes from organized shoplifting.

Silver linings

Target’s neighborhood had bright spots. The company gained market share in all five of its major commodity categories in terms of the number of items sold. In-store and website traffic grew 1.4% and the average ticket increased 1.3% compared to the same quarter last year. It also had record sales volumes for back-to-school, back-to-college, and Halloween.

Comparable sales, which track target sales online and in stores open at least 13 months, were up 2.7% over the same period last year. That beat Wall Street’s expectations of 2.2% growth, according to StreetAccount.

The company’s own brands, which are typically less expensive than national brands, grew twice as fast as total sales in terms of dollar sales, Hennington said.

Food and beverage was one of Target’s strongest sales categories, with low-double-digit comparable store sales growth. Essentials grew low-single digits fueled by sales of pet and health items. Beauty had comparable sales growth in the mid-teens.

On the other hand, sales slowed in other categories, especially homes, sporting goods and toys, said Hennington, the chief growth officer.

Cost and Christmas

Speaking to reporters, CEO Brian Cornell said Target is still looking for ways to use its scale to become more efficient. For example, it has opened a new kind of delivery hub to sort packages and get online purchases to shoppers faster and cheaper.

Fiddelke said the company will continue to invest in its workforce, but said “expense management is critical”.

“That kind of discipline will help us grow in different economic conditions and differentiate our business in the short and long term,” he said.

Target will share more details about its cost-cutting plan at an annual investor day, scheduled for March.

Despite the lower guidance, Target is still expecting avid holiday shoppers, Hennington said. Target has expanded its store count to include Disney stores and forged new partnerships, such as carrying items from the nostalgic toy brand FAO Schwarz.

And, she added, it will also feature budget-friendly gift items, including $3 Christmas ornaments and $5 candle assortments.

This story is evolving. Check back later for updates.

Retailers' inventory problems are expected to weigh on earnings

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