Dive Brief:
- Despite a soft third quarter, Target exceeded analysts’ expectations. The company on Wednesday reported total revenue of $25.4 billion, down 4.2% from a year ago, for the three months ended Oct. 28. Same-store sales fell 4.9%, which was in line with expectations.
- Target’s operating income was $1.3 billion, up 28.9% from last year. Chief Growth Officer Christina Hennington said on a call with analysts that growth in beauty offset declines in its discretionary categories, but as inflation eases the company expects consumers to have more space for discretionary purchases.
- Same-day services grew in Q3 by more than 8%. Drive Up, Target’s pickup service, led that segment of the business, with more than 12% growth, while inventory at the end of the quarter was 14% lower than last year.
Dive Insight:
Target has “seen a meaningful improvement in profitability compared with last year,” CEO Brian Cornell said during an earnings call. He noted the company continues to navigate through a challenging business environment that’s leading consumers to make tough decisions about their spending priorities.
Overall, Cornell said, consumers are still spending but things like higher interest rates and credit card debt, the resumption of student loan payments and lower savings have left people with less discretionary income.
One result of this is consumers delay spending until the last moment. For example, Cornell said, people who used to buy sweatshirts or denim in August or September now seem to wait until the weather turns cold before making those kinds of purchases.
“This is a clear indication of the pressures they're facing as they work to stretch their budgets until the next paycheck,” Cornell said. “Consistent with these pressures, as we look at the recent trends across the retail industry, dollar sales are being driven by higher prices with consumers buying fewer units per trip.”
Target gets hit harder when consumers pull back on spending because the retailer’s offering skews toward discretionary purchases, Neil Saunders, managing director of GlobalData, said in emailed comments.
“As the consumer mood has soured, the economic tide has turned against Target and made trading much tougher,” Saunders said. “This may only occur at the margins, with the odd consumer buying a couple fewer items or reducing visit frequency modestly – but this is sufficient to push sales growth firmly into the red.”
Despite that, Chief Financial Officer Michael Fiddelke said during the call that the company delivered better-than-expected performance on several fronts, including managing inventory, which in turn, benefited gross margin and SG&A. Freight costs and the impact of inventory shrink also were better than expected.
Fiddelke said Target’s financial guidance for Q4 reflects “a cautious posture” in part because the final three months of the year are typically a promotion-driven season. For the next quarter, the company expects comparable sales in a wide range around a mid-single-digit decline. Fiddelke also noted that 2023 is a 53-week year for accounting purposes. The extra week is likely to add about $1.7 billion in sales for the quarter.
About a week before Black Friday and Cyber Monday, Target touted that it will offer more than 10,000 new items for the holidays and that “thousands” of those items will be under $25 and exclusive to the retailer across categories.
In September, Target launched Figmint, its first private label cookware and kitchen brand. Also that month, the retailer announced a partnership with Kendra Scott to offer a collection of affordable jewelry and accessories.
Saunders said GlobalData’s initial read on Target’s holiday lineup is favorable. Newness in its offering is positive, and the company looks to have more gifting ideas, a focus on value-for-money, and an improved range of holiday candy and treats. “This may not help the chain defy gravity, but it should help take the edge off sales declines,” Saunders said.
