Target’s 3Q profit drops 52% as shoppers force price cuts

Target's 3Q profit drops 52% as shoppers force price cuts thumbnail

NEW YORK — An unexpected and potentially ominous pullback in customer spending ahead of the holiday shopping season pushed third-quarter profits at Target down 52% after it was forced to slash prices with Americans feeling the squeeze of inflation. The Minneapolis retailer expressed concern about its fourth quarter sales and profit due to what it has seen from customers in recent weeks. They are waiting for sales, rather than buying full-price goods. They also seek ways to reduce their spending.

Shares of Target tumbled 13% and other retailers slid as well. Macy’s and Kohl’s both fell 6%, while Nordstrom dropped 9%. Walmart shares were flat.

Target stated that they will be cutting expenses with a goal to save $2 billion to $3B over the next three-years. Executives stated that these cost cuts will not involve widespread layoffs or hiring freezes.

Target’s dreary quarter comes amid a backdrop of resilience from American consumers. The U.S. reported Wednesday that retail sales increased 1.3% in October compared to September. However, there was some noise in the report. The increase was led by car sales and higher gas prices, but those car sales may have been supercharged by the arrival of Hurricane Ian in late September, which destroyed up to 70,000 vehicles, according to economists at TD Securities.

Last month’s retail spending increased 0.9%, even though it did not include autos or gas.

It is clear that American consumers are shifting their spending habits. Many are trading down to cheaper options and shopping at stores where they feel they can save money. Walmart was able to demonstrate this with its Tuesday earnings report that showed better-than-expected results. One factor: more than 50% of Walmart’s U.S. business comes from groceries; that number is 20% at Target. With inflation all around, households take care of needs like food and shelter first. This dynamic is being played out as retailers enter the unofficial holiday season, which is the most important time of the year for them. According to Chairman and CEO Brian Cornell,

Target saw a decline in sales during the weeks leading up November. This was due to more customers cutting back on discretionary products. They are also trading down to in-store brands and buying smaller packages. This trend led to a quarterly profit that was far below Wall Street and Target’s expectations.

Many Target customers are now using credit cards or saving to shop, Christine Henington, chief growth officer of the company, said Wednesday.

Target is known for being a place where you can outfit your home well and be fashionable, something that has been lost in a world of cutting-edge shoppers. Other retailers are also worried about rising prices.

” Target will feel the chills first because of its discretionary spending, but it won’t be the only one to feel it,” said Neil Saunders (Managing Director at GlobalData Retail).

Kohl’s, Macy’s reported their quarterly results on Thursday. This should give more insight into American consumers’ mindset.

” “It’s an atmosphere where consumers have been stress,” Target’s Cornell stated. We know that they spend more on food, beverage, and household essentials. And as they are shopping for discretionary categories … they are looking for that great deal.”

Cornell expects that trend to continue through the holidays.

The disappointing quarter follows Target’s nearly 90% profit slide in the second quarter and a 52% drop in the first. Target warned in June that it would cancel orders from suppliers and cut prices aggressively due to a sharp spending shift by Americans.

Retailers were stunned by the rapid shift from pandemic spending like TVs and kitchen equipment to dinners out and movies to vacations. Inflation has made it harder to buy a flat screen or a smart blender.

Target reported a quarterly net income of $712million, or $1. 54 per share. This compares to $1. 49 billion, or $3. 04 per share in the year ago period. Analysts expected $2. 16 per share in the latest quarter, according to FactSet.

Revenue rose 3.4% to $26. 52 billion compared with the year ago quarter, which edged out Wall Street expectations, according to FactSet.

Comparable sales increased 2.7% — those that come from stores and online — on top of a 12.7% growth last year.

Cosmetics, food, beverage and household essential drove sales, offsetting weakness in discretionary items. Based on the number sold, Target gained market share in all five of its key merchandise segments.

And Cornell stated that shoppers are willing to spend on events like Halloween and back-to school.

The quarterly operating income margin rate in 2022, was 3.9%, compared to 7.8% in 2021 because markdowns hit profits. This is in addition to rising theft, merchandise and freight cost. Target stated that theft is a growing problem. Executives say that Target booked more than $400 million in losses from theft so far this year, with the number of thefts rising 50%.

Because of softening of sales and profits toward the end of the reporting period, Target said it is planning for a “wide range of sales outcomes in the fourth quarter.”

The company expects a low-single-digit decline for comparable sales for the fourth quarter with an operating margin rate of around 3%.

Target’s shares fell $26. 80 to $152. 16 Wednesday.

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Follow Anne D’Innocenzio: http://twitter.com/ADInnocenzio

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AP Economics Writer Chris Rugaber in Washington contributed to this report.

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