Target's 3Q profit drops 52% as shoppers force discounts

shopping2_21405259

Target reported an uptick in third-quarter sales but profits tumbled 52% after it was forced to cut prices on clothing and other goods to entice Americans squeezed by inflation.

The Minneapolis retailer voiced caution about its sales and profit for the fourth quarter and the critical holiday shopping season.

Target also said that will be slashing expenses with a goal of saving $2 billion to $3 billion over the next three years. Executives say the cuts will not include layoffs or hiring freezes.

Chairman and CEO Brian Cornell said that in the latter weeks of the most recent quarter that ended Oct. 29, sales and profit trends weakened significantly as customers waited for deals on discretionary items, or traded down to private brands as they continue to be wacked by inflation, rising interest rates and economic uncertainty. That resulted in a third-quarter profit below its expectations, he said.

Shares of Target Corp. slid 10% before the opening bell.

"It's an environment where consumers have been stressed,” he 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 said that mindset will continue through the holiday shopping season.

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

Retailers were blindsided by the lightening-fast switch from spending on goods for the home, like TVs and small kitchen appliances, to dinners out, movies and travel. Adding to that shift: surging inflation, which is creating less wiggle room for discretionary purchases like new clothing. The switch has also been a blow to retailers’ profits since general merchandise has a fatter profit margin.

However, Target has taken a bigger hit than its rival Walmart and the disappointing performance comes after a streak of stellar quarterly profit and sales results.

Walmart on Tuesday reported higher sales in its fiscal third quarter and raised its full-year earnings outlook.

Target posted net income of $712 million, or $1.54 per share in its fiscal third quarter. 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.

It reported revenue of $26.52 billion, up 3.4% from $25.65 billion in the year ago quarter. The sales came above estimates for $26.41 billion, according to FactSet.

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

The business was driven by beauty, food, beverage and household essentials, which offset weakness in discretionary items.

Third-quarter operating income margin rate was 3.9% in 2022, compared with 7.8% in 2021. The company said that profits took a hit because of higher markdowns, rising theft and merchandise and freight costs.

The company said that "based on softening sales and profit trends that emerged late in the third quarter and persisted into November," it would be prudent to plan for a wide range of sales outcomes in the fourth quarter.

Target said that it now expects a low-single-digit decline for comparable sales for the fourth quarter. Similarly, it said it believes that operating margin rate will be around 3%.

In August, Target said it was sticking to its prior guidance for full-year revenue growth in the low-to mid-single-digit percentage range. It also expects operating margin rate in a range around 6% in the second half of the year.