(Bloomberg) -- Target Corp. shares plunged Wednesday after the retailer trimmed its full-year earnings outlook, warning that a flat sales quarter and a buildup in inventory hurt profitability.
Executives said US consumers spent less on nonessential items such as clothes and home products — a weaker third-quarter picture than the one provided by Walmart Inc. earlier this week.
Profit also took a hit after Target stockpiled more products in preparation for the US port strike last month. Holding the additional inventory was more expensive than the company expected, eroding earnings.
Target shares tumbled 18% in New York, their biggest one-day drop since May 2022. The shares are trading Wednesday without the right to receive a dividend payout.
Investors questioned whether Target was simply losing share to its bigger retail rival and if other retailers would experience similar pain.
“Weak results at Target underscores how a big part of Walmart’s strength is market share gains,” said Vital Knowledge analyst Adam Crisafulli in a note. “The consumer may be ‘resilient,’ but they are still discerning and parsimonious. The poor Target performance probably doesn’t bode well for the likes of Kohl’s, Dollar General and Dollar Tree.”
Target Chief Executive Officer Brian Cornell tried to down-play the negative results, noting that issues like the port strike were a one-time problem and that the company’s early read on holiday sales are positive. He said the company is working to respond to weak demand and offset higher costs, but that it made the right decision to stockpile goods ahead of the port strike just in case it went longer than expected.
“We don’t regret these actions,” Cornell said on a call with reporters.
Comparable sales grew 0.3% for the quarter through early November, worse than the average analyst estimate compiled by Bloomberg, and a slowdown from the previous quarter. Target now sees earnings per share for the full year in a range of $8.30 to $8.90, down from the previous range of $9 and $9.70.
At physical locations, comparable sales fell 1.9% during the quarter, while comparable digital sales rose nearly 11%. The higher online sales also came with a higher cost of fulfillment, which contributed to a lower operating margin.
The company said customer traffic rose 2.4% in the third quarter due to recent price cuts. Apparel sales took a hit partly because the weather stayed warm, executives said, noting they have improved with temperatures cooling. Women’s performance apparel was a bright spot in the quarter.
“It’s disappointing that a deceleration and discretionary demand combined with some cost pressures have caused us to take our guidance back down after raising it last quarter,” Michael Fiddelke, Target’s chief operating officer and former chief financial officer, said on the call.
The results may renew investor concern after Target succeeded in ending a streak of negative sales in the previous quarter, suggesting a recovery was in the works. Target posted a string of weak results amid high interest rates and inflation before showing some success in boosting sales and traffic in the second quarter by offering deals such as $15 bras and price cuts on groceries including milk and bread.
Target executives said the holiday season is off to a solid start. US consumers are buying merchandise that’s new and affordable, according to the company, with beauty and fragrance products being standouts. Food and beverage sales rose during the quarter.
‘Resourceful and Strategic’
“Consumers have become increasingly resourceful and strategic on how they shop,” Rick Gomez, the company’s chief commercial officer, said on the call. He said shoppers are “willing to search” for deals, and “they will wait for the right moment.
Target executives said they are planning to lower prices on 2,000 items ahead of the holidays. The company said it will continue to invest in new offerings, such as its partnership with Taylor Swift ahead of Black Friday and products inspired by “Wicked” that’s set to release later this week.
Discretionary products will continue to make up nearly 50% of Target’s business, Cornell said on a call with analysts.
“We certainly see upside in the future as some of the macro trends change,” he said.
In contrast to Target, Walmart lifted its full-year outlook on Tuesday. Walmart said consumer spending has remained consistent and that prices for most goods aren’t rising, with groceries being the exception. The company said sales of clothes and other general-merchandise items grew in the low single digits during the third quarter, and it’s seeking to expand its assortment online.
Other big-box retailers have posted better-than-expected results so far this earnings season, though some of that has been weather-driven: Home Depot Inc. and Lowe’s Cos. raised their full-year outlooks after hurricanes and warm weather drove up spending on home improvement goods. But when it comes to larger projects, both companies said consumers are staying on the sidelines due to high interest rates and mortgage rates.
--With assistance from Katrina Compoli.
(Updates with commentary from analyst call)
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