I hate delivering bad news … most of all when it comes to money matters.
So, I can sympathize with Target Corp. (NYSE: TGT) CEO Brian Cornell, who had to deliver one bomb of a quarterly earnings report last week.
Adjusted earnings per share were down by almost half from the same quarter last year, missing analyst estimates by a country mile. And the outlook for the fourth quarter — including the critical Christmas holiday shopping season — wasn’t rosy at all.
I like Target as a long-term holding, and I wrote in favor of its dividend hike a few months ago. The shares are up close to 10% since my article. And this is after the thrashing they took this week following the earnings release.
But today’s comments are less about Target itself and more about what its results say about the broader economy. Let’s dig into it.
Target Is the Middle Class
Cornell didn’t beat around the bush:
In the latter weeks of the quarter, sales and profit trends softened meaningfully, with guests’ shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty…
While we’re ready to deliver exceptional value for our guests this holiday season, supported by the decisive inventory actions we took earlier this year, the rapidly evolving consumer environment means we’re planning the balance of the year more conservatively.
Target isn’t just another big-box retailer — it’s a symbol of mainstream, middle-class America.
This isn’t the slice of American society that buys all-organic produce at Whole Foods with their yoga mat in the backseat of their brand-new Tesla. It’s also not the demographic that scrounges to buy their necessities at the dollar store.
Target caters to the vast 70% to 80% of us who fall somewhere in the middle. And the message here is clear: The average American is having a hard time.
With costs of basic necessities much higher than they were even a year ago, that extra dollar that might’ve been spent on a new TV or an extra pair of shoes is now spent on milk or toothpaste.
The story gets more interesting the deeper we read into the details.
TGT’s Earnings Bombshell
Target reported losing more than $400 million this year over 2021 levels due to “inventory shrinkage.” That’s a polite way of saying theft. Target CFO Michael Fiddelke said that he expects 2022’s theft-related losses to be more than $600 million over 2021 levels.
Now, as for the “why” theft has skyrocketed, there isn’t a single answer. Organized crime is playing a big role. And people are more likely to steal when they’re desperate and prices rise.
But another factor is lack of manpower. It’s easier to steal when there are fewer employees available to watch. But workers are expensive and hard to come by these days. Turnover is higher than usual as workers jump ship to take higher wages elsewhere. So clamping down on theft isn’t going to be cheap.
The news for Target wasn’t all bad. Same store sales were up 2.7%, of which 1.4% was due to higher foot traffic. Shoppers still go to Target and still spend money there. But they are buying lower-margin items, and they’re more sensitive to price these days.
I should be clear that I don’t expect a major recession in the next six months. I don’t expect anything crazy like a 2008 meltdown. But I believe that Target’s results point to a rough finish to 2022. I’m not so sure the stock market is pricing in the ding to earnings that would likely bring.
So be careful out there. The bear market may yet have some mauling to do.
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To safe profits,
Charles Sizemore, Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.