Target Sounds Macro Alarm. Again.

The writing is on the wall. And it's scrawled in big, red letters. US corporate profits aren't going to hold up. There are too many margin headwinds. First it was soaring input prices and rising freight costs. Next it was a dramatic upturn in wages amid a historic labor shortage. Now it's an inventory overhang and a currency headwind. On Tuesday, Target surprised investors for the second time in a month. "The Company is planning several actions in the second quarter, including additional mark

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6 thoughts on “Target Sounds Macro Alarm. Again.

  1. Well… Prices getting slashed ought to be good for inflation, no? And that ought to be good for the stock market… Recessions are now good for the markets! Yihaa.

  2. The market basket for consumers appears to be changing again. This is an example of not being able to assume economic base stability over time. It is pretty amazing how the labor market has changed in 2.5 years. Corporate practices are changing rapidly too- just in time inventory management is out the window as well. So are long and brittle supply chains. We are going through a rapid adjustment. In a few more years things are going to look a lot different….Predicting economic variables is almost impossible….

  3. What’s happening at Target (and others who aren’t talking yet) is easily understood and inevitable. Any firm which has any fixed costs of operation has some degree of operating leverage which measures the rate of change in operating profits for a given change in revenue. The more operating leverage a firm has, the more its profits will increase with a gain in revenue and the more quickly those profits will fall when revenue falls. An operating leverage ratio of 2:1 means a 5% decline in sales will be met with a 10% decline in operating profit, and so on. The higher the proportion of fixed cost a firm has, the higher its leverage will be and the more damage will be done in a downturn. Fixed costs, in turn, are paid by gross profit dollars. OK, so look what’s happened to Target and others. They ordered stuff for spring and it didn’t come because of supply change issues. Now it’s finally available and the store is stuck with a bunch of out-of-season merchandise which it must markdown to get rid of to make room for back-to-school, fall, and Christmas stuff. Mark downs cut gross profit, the bucks that pay fixed costs, and inflation raises operating costs so suddenly even a small decline in sales leads to a much magnified loss of operating profit. Only retailers who managed to keep gross margins at normal levels and weren’t stuck with a bunch of undesirable merchandise will weather the storm. Most of them will not be that lucky. Tack on to this the need to raise worker salaries to get enough help and the problem is magnified further. Most people view workers as variable costs but for retail, most workers represent fixed costs that must be paid to keep the doors open. Right now retail is in an inevitable perfect storm. For many, this year Black Friday will be all too real.

  4. I think we’re looking at how the changes are coming fast and furious for the North American and European consumers and not so much at the rest of the world. In our grandchildren’s lifetime I suspect 10’s to 100’s of millions of people will starve to death as climate change and the depletion of the oceans picks up. The turn around warnings are to take action now before it’s too late. The billions of people who don’t have the option to stop using gas vehicles and switch to battery power for twenty five to fifty years and the countries who will be using coal, because green energy is not a luxury they can afford, guarantees that man-kinds changing to save the planet will be woefully too long. We’re not using less oil. We’re not littering the oceans less and we’re overfishing the oceans. We’re facing worse weather conditions for growing food. Russia and possibly China are going to war instead of saving the planet. The slippery slope effect is already tipping. Hang on.

  5. I’m a huge fan of the idea that you should have an idea of what the right price is before you buy something, whether it’s a t shirt a car, a house, a vacation, etc…..Target is mostly a list price store designed to look like a cheaper store. There are times when this stops working. Clearly, the disinflation from tech and globalizaliztion’s race to the bottom has been disrupted. We will have some sort of inflation for the next decade…On the other side, we could have skilled jobs for people who don’t like to read- if we help that come about…Oh, and forget about the peace dividend…

NEWSROOM crewneck & prints