Sales at Target slowed in March and decelerated further in April, the company said Wednesday, on its Q1 call.
Would-be macro mavens spent quite a bit of time in 2022 on retail watch as a number of related dynamics reinforced one another to the detriment of operating results.
Wage, transportation and freight costs were higher, supply chain management was a challenge and an inventory glut forced some businesses into deep discounts as consumption habits shifted back to services, leaving some retailers with too much accumulated “stuff,” a legacy of over-ordering during 2021, when Americans spent freely on goods.
It was also possible — ostensibly, anyway — to glean something about the impact of inflation on household budgets from parsing retail results, particularly results from Walmart, Target and the dollar stores.
Fast forward to 2023, and the consumer is still resilient. I think it’s fair to suggest most of us underestimated Americans’ willingness and capacity to keep spending, and notwithstanding familiar warnings about a tipping point, retail sales data released this week suggested underlying nominal spending held up last month despite abysmal consumer sentiment.
That’s the context for Q1 earnings from Target and Walmart. Do note: This week marks the one-year anniversary of black swan-esque selloffs for both retailers, whose shares plunged this time last year amid margin warnings.
The market may see things differently, but it was hard for me to put an overtly positive spin on Target’s results. Comps were a little better than expected, but management guided for a low-single digit decline in Q2. They maintained the full-year outlook, which includes a “wide range” of potential outcomes, including a scenario where comps fall and one where they rise.
Inventory was the lowest since Q2 2021, and fell 16% YoY thanks to a 25% reduction in discretionary categories. The company said “frequency businesses,” including household essentials, offset “continued softness” in discretionary spending during the quarter.
Target expects shrink to reduce this year’s profitability by more than $500 million versus last year. They cited theft and organized crime, and said they’re investing “significant” sums to “prevent this from happening.”
In Q1, shrink partially eroded the margin benefits from lower freight costs, price hikes, lower discount rates and a decline in digital fulfillment costs.
On the bright side, margins did beat, and EPS was well ahead of the Street, but revenue was flat and the company’s mention of “softening sales trends” toward the end of the quarter didn’t bode especially well. If you read the press release, the company also flagged higher SG&A due to “cost inflation across multiple parts of the business,” including wages and compensation, and said net interest expense rose 31% YoY.
Ultimately, Target’s report felt a bit ominous, particularly coming as it did on the heels of Home Depot’s outlook cut.
“The consumer is under pressure,” Christina Hennington, Target’s “Chief Growth Officer,” said on a call with reporters. “The consistent inflation, the running out of savings as well as just economic uncertainty in general is having an impact on their choices and they’re making trade-offs.”