Target missed the bullseye by a wide margin in the third quarter as the discount retailer took the brunt of a slowdown in consumer spending in more discretionary goods.
“In the closing weeks of the quarter, sales and earnings trends moderated significantly, with guest shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty,” Target Chairman and CEO Brian Cornell said in the press release. “This resulted in a third quarter earnings performance well below our expectations.
Target stocks fell more than 10% in premarket trading. Shares of the retailer are down 22% year-to-date, compared to a 16% drop for the S&P 500.
Speaking to reporters, Cornell added that a more cautious approach to holiday expectations is needed given current trends in the company.
“If you’re sitting here today, if you look at some of the syndicated data that’s been released, you’ve clearly seen a significant change in consumer shopping patterns as we ended October and moved into the month of November,” he said. “So obviously it’s an environment where consumers are stressed. We know they’re spending more money on food and beverages and household essentials. They’re looking for promotions and looking for that great offering. And I would expect promotional focus to continue through the holiday.”
Here are a few highlights from Target’s Q3 earnings:
The operating profit margin was 3.9%, while estimates for 5.35% were missing. The company says margins are “far behind” expectations.
Inventory reduction, mainly caused by “organized retail crime,” has cut the retailer’s gross profit margin by $400 million so far in 2022.
Comparable store sales increased by 2.7%, slightly above expectations for growth of 2.51%.
“Continued softness” noted for discretionary asset classes.
The stock rose 14.4% year over year, cooling off the 36% growth rate in the second quarter.
Adjusted earnings per share came in at $1.54, well below analyst estimates of $2.17.
Guidance lowered for the top and bottom lines for the fourth quarter.
“Soft” traffic trends called for November.
New three-year $2 billion to $3 billion cost savings initiative announced.
Several Wall Street analysts braced for a weak quarter and a 4Q guide from Target, including Citi retail analyst Paul Lejuez.
“We believe revenue remains healthy overall, with continued strong spending at the top end of Target’s revenue demographic,” Lejuez said in a note ahead of the results. “However, based on our conversations with the retail industry and with Target’s management, we don’t believe most companies (including Target) have seen a trade-in customer to date. And overall, the lower income consumer continues to struggle and prioritize to consumables over discretionary items, which has a negative margin impact for Target.”
The analyst added that the Citi team “believes management guidance for 4Q is overly optimistic.”
Brian Sozzi is editor-in-chief and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and further LinkedIn.
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