At a time when stores are brimming for the holidays, Target customers have begun to pull back on their impulse spending and save their shopping for when things are on sale.
For the third quarter in a row, Target Corp. missed investor expectations as it continues to see profits suffer in the face of sharp changes in consumer behavior.
This fall, Target's profit fell 52% compared to last year, more than Target leaders anticipated, in large part due to a more price-conscious consumer who is trying to make dollars stretch while navigating decades-high inflation.
"They're shopping very carefully on a budget," Target CEO Brian Cornell said. "And I think they're looking at discretionary categories and saying, 'All right, if I'm going to buy, I'm looking for a great deal and great value.'"
The company said Wednesday that its profit from August through October was $712 million, or $1.54 a diluted share, considerably less than the $2.13 that was the consensus forecast of analysts. Revenue was $26.5 billion, up 3.4%.
Sales at comparable stores and online rose 2.7% during the three-month period. But diminishing sales trends over the last few weeks pushed executives to forecast a sales decline for the end of the year that has left some analysts concerned.
"We're going to watch it carefully throughout the holiday season," Cornell said.
Target executives said shoppers are more often choosing cheaper store-brand alternatives to save money.
"It's obvious that food and essentials are holding up pretty well," said Neil Saunders, managing director for data analytics firm GlobalData's retail division. "But once you go across the aisle to non-food and general merchandise, there's a lot more softness there and of course that's where the better margins are and that's what Target has generally been very very good at, pushing those kind of impulse buys and discretionary things that people want to have."
Target also absorbed higher-than-expected product markdowns, more merchandise and freight costs. Its inventory shrinkage, an industry term for losses chiefly from theft, was $400 million higher through the first nine months of the year than it was in the same period last year. That decreased Target's nine-month gross profit margin by a half percentage point to 23.9%.
At Target, comparable sales in the most recent quarter grew in beauty products and essentials like health and pet supplies. However, Target has had challenges in its home goods, apparel and hard lines sections which includes electronics and sporting goods. Despite an early Target Deal Days sale in the beginning of October, the company also saw a deceleration in toy sales.
Seasonal moments like back-to-school and Halloween saw large sales growth for Target. But overall sales took a "precipitous decline" in the latter part of October, said Christina Hennington, Target's chief growth officer.
Those trends are persisting this month and led executives to forecast a low-single digit decline in comparable sales for the November-January period.
"That's very concerning because actually what should be happening is there should be an uptick in consumer activity as people start to prepare more for the holidays," said Saunders of GlobalData.
Supply chain issues may have pushed consumers to shop early for the holidays last year, but this season they're taking their time to find deals and feel there is less of a chance of items selling out, said Brian Yarbrough, an analyst with Edward Jones.
Target executives are likely trying to be more conservative about forecasts after missing estimates several times this year, Yarbrough said. Still, their wariness is a warning for the broader economy.
"They were the first one in awhile now that has kind of thrown out that we are seeing an abrupt slowdown," Yarbrough said. "Even some of the other retailers who have reported this week haven't said the same thing."
Target's report follows a more upbeat earnings account from its larger competitor Walmart, which reported on Tuesday that sales rose more than 8% as people shopped for savings in groceries and other necessities at its stores.
Target shares closed down 13% Wednesday and helped push the broader stock market lower. Target shares are now down 33% for the year compared to a 16% drop in the S&P 500.
Target announced cost-cutting measures to shave $2 billion to $3 billion over the next three years. Target generates about $20 billion in operating expenses a year. The company said the savings would not come in the form of mass layoffs or widespread store closings.
Target's inventory, which was a problem earlier in the year, rose about 14% in the latest quarter, slower than the 18% gain in the same period a year ago.
"We got a lot of product that showed up earlier than we thought it would [for the holiday]," said Michael Fiddelke, Target's chief financial officer. "That fills up some of our building. That makes us operate a little less efficiently, but I'll tell you we'll take it compared to where we were a year ago when we were cutting it close and product was getting here just in time."