Target’s 3Q profit drops 52% as shoppers force price cuts

Nov 16, 2022, 4:32 AM | Updated: 2:28 pm
FILE - Signage for Target is shown in Metairie, La., Thursday, Aug. 15, 2019. Target reports quarte...

FILE - Signage for Target is shown in Metairie, La., Thursday, Aug. 15, 2019. Target reports quarterly financial results reports quarterly financial results Wednesday, Nov. 16, 2022. (AP Photo/Gerald Herbert, File)

(AP Photo/Gerald Herbert, File)

NEW YORK (AP) — An unexpected and potentially ominous pullback in customer spending ahead of the holiday shopping season pushed third-quarter profits at Target down 52% after it was forced to slash prices with Americans feeling the squeeze of inflation.

The Minneapolis retailer voiced caution about its sales and profit during the fourth quarter because of what it’s seen from its customers in recent weeks. They’re waiting for sales rather than buying goods at full price, and finding ways to cut down on spending in other ways as well.

Shares of Target tumbled 11% and other retailers slid as well. Macy’s and Kohl’s fell more than 8% and Nordstrom slumped more than 10%. Walmart’s shares were flat.

Target said that will be slashing expenses with a goal of saving $2 billion to $3 billion over the next three years. Those cost cuts will not include widespread layoffs or hiring freezes, executives said.

Target’s dour quarter arrives amid a backdrop of resiliency from American consumers.

The U.S. on Wednesday reported that retail sales rose 1.3% in October from September, though there was some noise in that report. The increase was led by car sales and higher gas prices, but those car sales may have been supercharged by the arrival of Hurricane Ian in late September, which destroyed up to 70,000 vehicles, according to economists at TD Securities.

Still, excluding autos and gas, retail spending rose 0.9% last month.

What has become clear is that spending by the American consumer is shifting, with many trading down to cheaper options, and to stores where they think they can save money. That was evident at Walmart, which reported better-than-expected earnings Tuesday. One factor: more than 50% of Walmart’s U.S. business comes from groceries; that number is 20% at Target. With inflation all around, households take care of needs like food and shelter first.

Lowe’s and Home Depot both reported higher sales in their third quarter as shoppers keep spending on home projects. T.J. Maxx parent released on Wednesday solid results, noting “treasure hunting” for bargains is resonating with customers.

Mixed signals are playing out as retailers head into the unofficial start of the holiday season, the most critical period of the year for them.

Target’s sales weakened significantly in the weeks leading up to November, with more customers cutting back on discretionary items, said Chairman and CEO Brian Cornell. They’re also buying smaller packages and trading down to instore brands. That trend pushed quarterly profit far below the expectations of both Target, and Wall Street.

Many Target customers have begun to lean on credit cards or have dipped into savings to shop, Christina Hennington, the company’s chief growth officer, told analysts Wednesday.

Target has built a reputation as being tuned into fashion and a place to outfit your home smartly, areas where shoppers may now be cutting back. But other retailers are not immune to customers anxious about rising prices.

“With its exposure to a lot of discretionary spend, Target will feel the chill first, but it will not be the only retailer to catch a cold,” said Neil Saunders, managing director at GlobalData Retail.

Kohl’s and Macy’s report quarterly results on Thursday, which should offer more insight into the mindset of the American consumer.

“It’s an environment where consumers have been stressed,” Target’s Cornell said. “We know they are spending more dollars on food and beverage and household essentials. And as they are shopping for discretionary categories … they are looking for that great deal.”

Cornell expects that trend to continue through the holidays.

The disappointing quarter follows Target’s nearly 90% profit slide in the second quarter and a 52% drop in the first. In early June, Target warned that it was canceling orders from suppliers and aggressively cutting prices because of a pronounced spending shift by Americans.

Retailers were blindsided by the lightening-fast shift from pandemic spending on things like TVs and kitchen appliances, to dinners out, movies and vacations. Now, inflation has created less wiggle room for a new flat screen or a smart blender.

Target posted quarterly net income of $712 million, or $1.54 per share. That compares with $1.49 billion, or $3.04 per share in the year ago period. Analysts had expected $2.16 per share in the latest quarter, according to FactSet.

Revenue rose 3.4% to $26.52 billion compared with the year ago quarter, which edged out Wall Street expectations, according to FactSet.

Comparable sales increased 2.7% — those that come from stores and online — on top of a 12.7% growth last year.

Cosmetics, food, beverage and household essential drove sales, offsetting weakness in discretionary items. Target did gain market share across all five of its key merchandise categories based on the number of items sold.

And Cornell said shoppers are ready to spend when it comes to such events as Halloween and the back-to-school season.

The quarterly operating income margin rate was 3.9% in 2022, compared with 7.8% in 2021 as markdowns hit profits, on top of rising theft and merchandise and freight costs.

Target said theft is a growing problem, with the number of thefts rising 50% so far this year.

Because of softening sales and profits toward the end of the reporting period, Target said it’s planning for a “wide range of sales outcomes in the fourth quarter.”

The company expects a low-single-digit decline for comparable sales for the fourth quarter with an operating margin rate of around 3%.

Target’s shares fell $20.91 to $158.07 Wednesday.

_____

Follow Anne D’Innocenzio: http://twitter.com/ADInnocenzio

_____

AP Economics Writer Chris Rugaber in Washington contributed to this report.

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

AP

FILE - A vehicle drives past the Jefferson oil drill site located in the residential area in Los An...
Associated Press

Los Angeles City Council votes to ban oil and gas drilling

The Los Angeles City Council voted unanimously on Friday to ban drilling of new oil and gas wells and phase out existing ones over the next 20 years. The vote comes after more than a decade of complaints from city residents that pollution drifting from wells was affecting their health. Los Angeles was once a […]
16 hours ago
FILE - This image provided by the National Institute of Allergy and Infectious Diseases (NIAID) sho...
Associated Press

US plans end to mpox public health emergency in January

WASHINGTON (AP) — The federal government plans to end in January the public health emergency it declared earlier this year after an outbreak of mpox infected more than 29,000 people across the U.S. Mpox cases have plummeted in recent weeks, with just a handful of new infections being reported every week in the month of […]
16 hours ago
FILE - A Dixie Valley toad sits atop grass in Dixie Valley, Nev., on April 6, 2009. The tiny Nevada...
Associated Press

Endangered listing for Nevada toad in geothermal power fight

RENO, Nev. (AP) — A tiny Nevada toad at the center of a legal battle over a geothermal power project has officially been declared an endangered species after U.S. wildlife officials temporarily listed it on a rarely-used emergency basis last spring. “This ruling makes final the listing of the Dixie Valley toad,” the U.S. Fish […]
16 hours ago
FILE - Tennessee Valley Authority President Jeffrey Lyash speaks with the Times Free Press from the...
Associated Press

Utility recommends natural gas plant despite objections

NASHVILLE, Tenn. (AP) — The nation’s largest public utility on Friday recommended replacing an aging coal burning power plant with natural gas, ignoring calls for the Tennessee Valley Authority to speed its transition to renewable energy. TVA announced the completion of its environmental impact statement for replacing the Cumberland Fossil Plant near Cumberland City, Tennessee. […]
16 hours ago
Associated Press

How major US stock indexes fared Friday 12/2/2022

Worries about inflation weighed on Wall Street, leaving major indexes mixed after another bumpy day of trading. A government report showing that wage growth accelerated last month spooked investors since it could mean the Federal Reserve will be less able to ease up on its fight against inflation. The yield on the two-year Treasury, which […]
16 hours ago
FILE - Former film producer Harvey Weinstein appears in court at the Clara Shortridge Foltz Crimina...
Associated Press

Jury to begin deliberations at Harvey Weinstein rape trial

LOS ANGELES (AP) — The jury has received the case and are set to begin deliberations Friday afternoon in the Los Angeles trial of Harvey Weinstein. Jurors will have to decide on two rape counts and five other sexual assault counts after hearing more than four weeks of evidence in the trial of the 70-year-old […]
16 hours ago

Sponsored Articles

(Photo via MLB's Arizona Fall League / Twitter)...
Arizona Fall League

Top prospects to watch at this year’s Arizona Fall League

One of the most exciting elements of the MLB offseason is the Arizona Fall League, which began its 30th season Monday.
...
Children’s Cancer Network

Children’s Cancer Network celebrates cancer-fighting superheroes, raises funds during September’s Childhood Cancer Awareness Month

Jace Hyduchak was like most other kids in his kindergarten class: He loved to play basketball, dress up like his favorite superheroes and jump as high as his pint-sized body would take him on his backyard trampoline.
...
Day & Night Air Conditioning, Heating and Plumbing

Here are 4 signs the HVAC unit needs to be replaced

Pool renovations and kitchen upgrades may seem enticing, but at the forefront of these investments arguably should be what residents use the most. In a state where summertime is sweltering, access to a functioning HVAC unit can be critical.
Target’s 3Q profit drops 52% as shoppers force price cuts