Earnings target plunges 90% as inflation-weary buyers pull back

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New York
CNN Business

Target said its profits fell 90% in the second quarter, well below expectations as inflation-weary customers cut spending on non-essential items.

Retailers, including Target, were forced to cut prices for general merchandise, such as apparel, electronics and homewares, due to excess inventory of merchandise. Consumers had to redirect more of their spending to more expensive food and gasoline.

But Target said its price cuts had little effect: It ended the quarter with 1.5% more inventory than three months earlier and 36% more than a year ago.

The company said it had reduced the amount of discretionary items it held in warehouses, but Target noted that sales of those items “put significant pressure on our near-term profitability.”

Shares of Target (TGT) fell 3% in morning trading on the report.

Target’s quarterly net profit fell to $183 million, down significantly from $1.8 billion in the same period a year ago.

Additionally, its adjusted earnings of 39 cents per share were well below the 72 cents forecast by analysts polled by Refinitiv. Sales of $26 billion were up slightly from a year ago and about in line with forecasts.

After seven quarters of strong profit growth, this is the second straight quarter of profit slumps at Target — and the drop was much larger than the 40% drop in the previous quarter.

Consumers’ pullback on demand for discretionary items is one of the factors raising fears of a recession, with consumer spending responsible for nearly three-quarters of the nation’s economic activity.

Target’s disappointing results contrasted with much stronger results from its biggest rival Walmart, which reported on Tuesday that profits were down only slightly from a year earlier. Walmart also said it expects an 8% to 10% drop in annual revenue, though that’s a smaller drop than previously expected.

The environment for Target and similar retailers remains “challenging,” CEO Brian Cornell told investors Wednesday. But Target sees “an encouraging start to the back-to-school season,” he said.

He thinks the hit to earnings in the last quarter is unlikely to be repeated: “The high-level story is this: the vast majority of the financial impact of these actions on stocks is now behind us.”

Still, these are tough times to be a retailer given the unpredictability of consumer spending and the effect of macro factors like inflation.

The goal is “to hear from our customers that they still have purchasing power but are increasingly feeling the impact of inflation,” said Christina Hennington, the company’s chief growth officer. ‘company. She said, however, that the drop in petrol prices over the past two months was “encouraging”.

These trends are not unique to Target. A recent government report echoed Hennington’s comments, showing retail sales at general merchandise stores like Target fell 0.7% in July from June after adjusting for seasonal factors – even though the Overall retail sales remained essentially flat over the same period.

And spending at gas stations fell $1.2 billion in July from June due to lower gasoline prices mentioned by Hennington.

These trends are hitting Target harder than its competitor Walmart, which derives a greater share of its sales and profits from essentials like groceries. The target is generally more dependent on these discretionary elements.

Walmart has a reputation for offering the lowest prices among big-box retailers in many categories – but in its earnings report on Tuesday, the company said sales to middle- and upper-income shoppers had increased.

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