On Wednesday, Target Corp (TGT.N) released guidance predicting an unexpected drop in holiday-quarter sales. The company attributed the drop to rising inflation, as well as “dramatic changes” in consumer preferences which has shifted consumer demand for everything from toys to electronics.
Shares fell 17% in early trading on the report, which also noted that shoppers were holding back for steeper discounts, and that this had cut third quarter profits by 50%.
Target announced that in response to this it would enact a cost-cutting plan which would save $2 billion to $3 billion over three years. It did not offer any specifics on the plan, though it said it would not involve mass-layoffs or a hiring freeze.
Target Chief Executive Officer Brian Cornell said, “Clearly it’s an environment where consumers have been stressed.”
With a product mix which weighs more heavily toward discretionary items such as clothing, home furnishings and electronics, the pullback in consumer spending of late has hit the retailer particularly hard, forcing it to offer large discounts to clear inventory.
Even with large discounts, executives have noted consumers are still passing over its products as they focused their spending on household essentials.
Christina Hennington, Target’s chief growth officer said, “It was a precipitous decline (in discretionary demand), and frankly, we’ve seen those trends in the early part of November as well.” The company cut its fourth quarter operating margin forecast by half to roughly 3%, due both to expectations of larger holiday discounts, as well as a rising amount of organized theft throughout its stores.
On an earnings call with reporters, Target CFO Michael Fiddelke said, “At Target, year-to-date, incremental shortage has already reduced our gross margin by more than $400 million vs. last year, and we expect it will reduce our gross margin by more than $600 million for the full year.” He noted there are, “a handful of things that can drive shrink in our business and theft is certainly a key driver. We know we’re not alone across retail in seeing a trend that I think has gotten increasingly worse over the last 12 to 18 months. So we’re taking the right actions in our stores to help curb that trend where we can, but that becomes an increasing headwind on our business and we know the business of others.”
