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US retailer Target cuts outlook, misses big on profit as shoppers retrench

Retailer’s move is latest sign that US consumers are slowing their spending

Target cut its outlook amid a wider slowdown Photographer: Sarah Silbiger/Bloomberg

Wed Nov 16 2022 - 12:28

Target warned in its latest earnings report that US shoppers are pulling back, slamming the US retailer’s profit and dimming its outlook.

Adjusted earnings tumbled to $1.54 (€1.52) a share in the fiscal third quarter, the company said. That’s below the lowest analyst estimate.

For the current quarter, the company is projecting a drop in comparable sales, the first decline in five years, and predicts operating profit will shrink to about 3 per cent of revenue -- roughly half the previous forecast. Target also unveiled a plan to save as much as $3 billion by streamlining operations but stopped short of mass job cuts.

“In the latter weeks of the quarter, sales and profit trends softened meaningfully, with guests’ shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty,” chief executive Brian Cornell said in a statement. “This resulted in a third-quarter profit performance well below our expectations.

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The report is likely to fuel new concern about the health of US consumers, who have been squeezed this year by the highest inflation in four decades. While Walmart reported upbeat results for the same quarter, much of its strength came from market-share gains among higher-income households as more shoppers traded down in search of lower prices. Target’s outlook suggests it’s having more trouble keeping up.

The shares tumbled 14 per cent in premarket trading.

The difficulties will linger into 2023, chief financial officer Michael Fiddelke said in a briefing with reporters, without offering financial details. The goal of Target’s long-term efficiency plan is to save $2 billion to $3 billion over the next three years, and the company is reexamining everything from how it acquires apparel to how it handles digital orders.

“We’re not planning layoffs,” he said.

In the third quarter, operating profit totaled 3.9 per cent of sales, Minneapolis-based Target said. In August, the company had forecast a range around 6 per cent in the second half.

Revenue climbed 3.4 per cent to $26.5 billion. Comparable sales rose 2.7%, while Wall Street had predicted 2.5%.

Target said it eked out unit-share gains in its five major merchandise categories in the third quarter. It also made progress in clearing out bloated inventory, Fiddelke said. But it did so in part by marking down prices more than expected, dragging down profit.

Additional blows came on two other fronts. One was the cost of managing inventory that arrived earlier than expected as supply-chain snarls improved, a problem Fiddelke said he welcomed as preferable to last year’s shortages.

Another came from shrink, which is retail-industry jargon for goods lost to theft, damage or administrative error. The CFO declined to specify how much was due to stealing but said shoplifting has been getting worse. Target said it has taken a hit of more than $400 million so far this year from shrink.

On the sales floor, meanwhile, the pressures on Target’s profit show little sign of easing. Shoppers have become increasingly reticent to buy goods that aren’t on sale, said chief growth officer Christina Hennington. They’ve also been shifting their spending to private-label goods and smaller pack sizes -- or larger sizes that are on promotion.

While food and beverage sales have held their own, discretionary categories such as home items, sporting goods and toys have lagged. Target’s comparable-store sales peaked in September and have been falling since then, Hennington said.

“It was a precipitous decline,” she said in the briefing. -- Bloomberg

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