Target posts huge earnings miss as consumers pull back
Yahoo Finance Live anchors discuss third-quarter earnings for Target.
Video Transcript
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BRIAN SOZZI: Target stock is getting ripped to shreds in the premarket, after the big box retailer missed the profit bull's eye in the third quarter by a very wide margin. CEO Brian Cornell striking a cautious tone in a media call with me, noting that a slowdown in consumer spending sapped its profits and put a cloud over its upcoming holiday season. No surprise here.
Target the most visited ticker page on Yahoo! Finance right now. And I jotted down three notes here. We have the full story, written story, on our home page right now.
But first, Target missed by $0.63 on earnings. I cannot stress how just bizarre that is for a high-quality company like Target, especially after earnings were reset after their very disappointing second quarter. So that's one.
Number two, this is no longer an inventory issue, I would argue, with Target. This is a top-line issue or it's become a top-line issue at Target because consumers have pulled back in a good deal. Brian Cornell telling me on this media call, that consumer spending patterns changed in October. People buying less discretionary items. And that trend continued into November.
And last but not least here, is the tone change by Cornell and CFO Michael Fiddelke on this media call that we had with them. Just sounded like a company really preparing for a recession. Also calling out $2 billion to $3 billion in cost cuts for the next three years. I mean, this is Target. This stuff's not supposed to happen.
BRAD SMITH: Well, it's also [CHUCKLES] at a time where we know they're facing some tough comps. But even with those tough comps, they've continued to come out time after time, and to your point, have to bring down the expectations.
And then the dampening of those expectations, the stock has been highly reactive. Highly reactive here, again, on the day, down 15% about 28 minutes before the start of today's trading activity.
Some of the sales here and the stacks, I'll mention as well. 12.7% growth they had seen last year. This year, 2.7% comparable sales growth. And that was really only driven by 1.4% traffic growth and then 1.3% increase in average ticket.
But it's really the areas that they're continuing to have problems. And one of those areas, we heard this in Walmart's earnings as well, in some of the continued discretionary category softness, Target saying in their report. They did see some good-- some bright spots in beauty, food and beverage, and household essentials.
JULIE HYMAN: Yeah, and that's what we heard from Walmart as well. But any of that discretionary stuff-- whether you're talking about home goods, whether you're talking about apparel-- they're having to cut prices. That's the bottom line here. And so that's really slashing their operating profit margin.
Profit margins, only 3.9%. The target for the second half of the year for Target for-- the target for Target--
BRIAN SOZZI: I saw what you did there.
JULIE HYMAN: --is 6%. So they're coming in under 4% when 6% is the target. And guess what? Operating profit margins are gonna be weak this quarter as well because they are continuing to have to cut prices and offer sales to move that merchandise out of the door. So that is a big issue.
They're also-- they at least manage to keep comps up in this last quarter. This current quarter, that ain't gonna happen. The company is forecasting its first drop in comparable sales in five years. This is not what we have become accustomed to from Target, which has been a consistent performer, particularly on the discretionary side of the store. And it's just not happening.
And then there is one other theme that you pointed out in a separate story this morning, Sozz, that is really kind of shocking. That is the amount of merchandise that is walking out the door without being paid for. They call it shrink in the-- in the retail industry. $400 million in shrink this year. And this is not like individuals like you and me going and picking up something--
BRAD SMITH: Whoa, don't loop me into that.
JULIE HYMAN: It sounds like--
BRAD SMITH: I'm not doing this.
JULIE HYMAN: No, it's not individuals of any kind. It sounds like this is organized crime, organized hits to stores where there is stuff being stolen.
BRIAN SOZZI: I think this number was shocking. And I'm not surprised to see this is the top story on Yahoo! Finance this morning, just in people reading it. This is a big bite out of this company's profits.
But also, let's keep in mind, this is not just a Target issue. Premarket, we're seeing weakness in a Best Buy. We're seeing weakness in a Williams-Sonoma. A lot of those home furnishings, a lot of those discretionary categories, this Target report is really setting the tone across the board. Just not a good result.
And I also add this, too. On that media call, guys, first time I've heard a retailer say this, that consumers are waiting out promotions. So if the consumer is not getting a great discount right now, they're not buying the product. I have not heard that before. And the fact that Target called it out, concerned about Macy's results. Concerned about many other retailers, notably specialty apparel, when they start reporting very soon.
BRAD SMITH: Here's another weak area, and just very briefly here, the digital comparable sales only up 3/10 of a percent here. And what that signals is-- for Target, which I get a ton of emails from them and most of their customers do. The second you buy one thing online, you'll get about three other emails after that trying to upsell you on some of the other products.
But for the digital comparable sales to-- the growth, at least, to shrink to this level, goes to show that there are not as many people that are initiating their searches on Target or perhaps not even, you know, following through with the actual basket that they've built on the platform. And so I think that is a considerable item to keep watching going forward from here, especially going into the holiday season, when they are looking for some of those discounts as well.
