Targetprofit fell about 50% in its third fiscal quarter as it Junk inventory and sales slowed as the holidays approached, 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 cut up to $3 billion in total costs over the next three years, citing the need to become more efficient after two years of dramatic sales gains.. The retailer’s revenue has increased by around 40% during the Covid pandemic.
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Target did not say how it will achieve its savings goal, but said it had no plans for layoffs or a hiring freeze.
Shares of the company fell more than 13% on Wednesday. The stock had closed up around 4% on Tuesday after its rival walmart published a positive report on the results.
Here’s how Target fared for the three months ended October 29, compared to Refinitiv’s consensus estimates:
- Earnings per share: $1.54 vs. $2.13 expected
- Revenue: $26.52 billion vs. $26.38 billion expected
Target saw sales decline as families faced higher prices, compromising between what they needed and what they wanted – a potential warning sign for the holiday shopping season. Christina Hennington, Target’s chief growth officer, said price sensitivity among customers intensified in the last two weeks of October.
“It was a precipitous decline and, frankly, we saw these trends in early November as well,” she said in a call with reporters.
The inflation factor
Target echoed many of the same themes as its competitor Walmart. Consumers are feeling strained by rising prices for groceries, housing and other basic necessities. They buy fewer full-price items and wait for promotions instead. To optimize their budget, they choose smaller items, value packs or cheaper own brands from retailers.
People are also spending less on discretionary goods. Walmart also on Tuesday spoke of lower spending on clothing, electronics and similar items. But the discounter exceeded Wall Street expectations by enticing shoppers with its low-priced groceries.
Bargains have returned to the retail sector after years of reduced inventory and stockouts, a dynamic that is also affecting the results of companies, including Target. The company said Wednesday it now expects a weaker holiday quarter. It expects a low single-digit decline in comparable sales in the three-month period and an operating margin rate of around 3%.
Target did not provide an outlook beyond the holiday quarter, but said it expects difficult conditions to persist.
“As we look to the future, we expect the challenging environment to persist beyond the holiday season and into 2023,” Chief Financial Officer Michael Fiddelke said on the call with the journalists.
The retailer has made progress in clearing much of its excess merchandise. Its inventory was up about 14% year over year, compared to 36% in the second quarter and 43% in the first quarter. Yet getting rid of these assets hurt his profits. Target’s third-quarter net profit fell by about half — to $712 million, or $1.54 per share, from $1.49 billion, or $3.04 per share, a year earlier . Revenue rose 3.4% to $26.52 billion from $25.65 billion a year earlier.
It also missed its target for healthier operating margins in the second half of the year. It promised an operating margin rate of around 6% when it downgraded its profit outlook for the second time. In the third quarter, its operating margin rate was 3.9%.
Target saw higher-than-expected markdowns, particularly in the final weeks of the quarter, Fiddelke said. It also spent more to manage inventory that arrived early as the supply chain backlog eased, he said.
He also said Target was seeing a higher level of shoplifting — which jumped about 50% year over year. So far this fiscal year, those losses have impacted Target’s margins by more than $400 million. Most of this comes from organized retail theft.
The Target area had bright spots. The company gained market share in its top five merchandise categories by looking at the volume of items sold. In stores and on its website, traffic increased by 1.4% and the average number of tickets increased by 1.3% compared to the year-ago quarter. It also achieved record sales volumes for back-to-school, back-to-school and Halloween.
Comparable sales, which track Target’s sales online and in stores open at least 13 months, rose 2.7% from a year earlier. That beat Wall Street expectations of 2.2% growth, according to StreetAccount.
The company’s own brands, which are generally less expensive than national brands, grew at twice the rate of its total business in dollar sales, Hennington said.
Food and beverages was one of Target’s strongest sales categories, with double-digit comparable sales growth. Essentials posted mid-single digit growth, fueled by sales of pet and healthcare products. Beauty saw comparable sales growth in the mid-teens.
By contrast, sales slowed in other categories — particularly home, sporting goods and toys, said Chief Growth Officer Hennington.
Costs and Christmas
On the call with reporters, CEO Brian Cornell said Target is always looking for ways to use its scale to become more efficient. For example, it 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 critically important.”
“This kind of discipline will ensure our growth in various economic conditions and set our business apart 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 forecast, the company still expects avid vacation shoppers, Hennington said. Target expanded the number of stores with Disney boutiques and entered into new partnerships, such as the sale of items from the nostalgic toy brand FAO Schwarz.
And, she added, it will also offer budget gifts, including $3 Christmas ornaments and $5 candle assortments.