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Among US big box retailers, Target used to have an edge: it sold relatively little food and relatively more goods such as clothing, beauty and homeware. That made sense, because food is one of the toughest parts of American retail thanks to its razor-thin profit margins. Now, that advantage has turned on its head.
The archetypal middle-class Target shopper no longer feels so flush, judging by its latest quarterly earnings. The company reported anaemic sales growth and a drop in profit; it also cut its full-year earnings guidance because it thinks the crucial holiday shopping season will be less lucrative than it anticipated.
That leaves chief executive Brian Cornell with a problem — reflected in a share price that tumbled 22 per cent on Wednesday — shedding $15bn in market value. Inflation-weary shoppers are less likely to pick up a festive oven mitt when devoting a bigger chunk of each pay cheque to bread and butter. In harder times, discretionary goods are the first to go.
Pressures from the likes of Walmart are clearly taking a toll. Just a day earlier, Target’s larger rival raised its revenue and profit forecast after its third-quarter results trounced market expectations. It is poaching higher- income customers with cut-price groceries and essentials.
Cornell is right to point out that Americans will buy toys, new rugs and sofa cushions again. Target’s beaten-up shares — now down more than 50 per cent from their 2021 peak — are cheap. They are valued at just 16 times forward earnings, against Walmart’s 32 times, according to S&P Global Market Intelligence. They offer plenty of potential upside when the pendulum swings back in the company’s favour.
The risk is that Target shares may first have farther to fall. More than half of the company’s sales last year came from discretionary spending categories. Groceries made up only 23 per cent of total revenue, compared with more than 50 per cent at Walmart.
This merchandise mix not only makes Target more susceptible to swings in consumer sentiment but also leaves it more exposed to supply chain disruptions and higher costs if president-elect Donald Trump goes ahead with his pledge to impose a 60 per cent tariff on goods from China.
Retail habits that change today may not change back. Target itself says customers have become “more resourceful”, waiting for discounts and promotions before buying. With Walmart flogging cheap groceries at one end and retailers such as TJ Maxx offering discounted clothing and homeware at the other, Target could struggle to convince shoppers to pay full price for its goods — and its shares — even when customers’ fortunes improve.
pan.yuk@ft.com
