Tough quarter for Target, which reported a $1 billion Q1 profit yesterday … a big number, but one that was about half that reported during the same period a year ago. Q1 revenue was up four percent, to $24.8 billion, same-store sales were up 3.3 percent, and digital sales were up 3.2 percent, but profit was hit by inflation, supply chain problems and a change in consumer spending patterns.
“Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time,” CEO Brian Cornell, Target’s chief executive, said in a prepared statement.
The New York Times writes that Cornell also cited "higher transportation costs and 'a more dramatic change in our sales mix than we anticipated' as factors that hurt profits and put an 'additional strain on our already-stressed supply chain.'
"As consumers shifted their spending, in part because of the end of pandemic stimulus payments, Target was saddled with an oversupply of items like kitchen appliances, televisions and outdoor furniture, Mr. Cornell said. Shoppers have switched their focus to 'going-out categories,' he said, like fashionable clothes and travel-related items."
The Times goes on: "Target seemed to encounter many of the same problems as Walmart, which on Tuesday reported that its latest quarterly profits fell 25 percent, pointing to higher prices for fuel and labor, among other things, as a drag on profits. Walmart also missed Wall Street’s expectations for the first time in many years, and saw its share price fall by the most in a day since the 1980s. Its stock continued to fall on Wednesday, down 6.8 percent."
In its coverage and analysis, CNBC writes:
"The results this week could foreshadow trouble for a number of retailers, including Macy’s, Kohl’s, Nordstrom and Gap, which have yet to report results for the first quarter of 2022. These companies that rely on consumers coming inside their stores to splurge on new clothes or shoes could be particularly pressured, as Walmart hinted that shoppers were beginning to pull back on discretionary items to budget more money toward groceries.
"At the same time, retailers are citing an uptick in demand for items such as luggage, dresses and makeup as more Americans plan vacations and attend weddings. But the concern is that consumers will be forced to make trade-offs, somewhere, in order to afford these things. Or they’ll seek out discounted goods at shops such as TJ Maxx."
- KC's View:
In the words of Bette Davis in All About Eve, "Fasten your seat belts. It's going to be a bumpy night."
If the markets were a direct reflection of what's likely to happen with retailers like Walmart and Target, you'd think that there would be far less pessimism - if inflation continues and a recession occurs, it is likely to be good for big retailers like Walmart and Target that can communicate a strong price/value message.
It is kind of ironic, by the way, that both Target and Walmart said they got stuck with merchandise they couldn't sell at a time when supply chain issues created a surfeit of customers who couldn't find the products they wanted.
Clearly, it is going to be a tough 12-18 months going forward. It is going to be important for retailers to be clear, consistent and constant in how they talk to their customers. At the risk of sounding like a broken record, I continue to believe that this is the time for retailers to define ways to draw closer to their shoppers, especially their best shoppers. They need to recognise that even/especially in a time of economic uncertainty, focusing less on individual transactions and more on creating sustained and sustainable relationships with shoppers is the best strategy.
I do think that we're going to see some aggressive marketing of price cuts by retailers of various stripes, as they look to directly address consumer concerns. For example, in the UK, The Sun reports that Tesco is implementing changes in its Clubcard loyalty program, offering one-third off a number of both fresh and packaged products, including private label items. The story notes that "members can save cash with loyalty scheme, which is free to join, as Clubcard prices are only for members, and you'll pay the usual price if you don't have a card."
I suspect we're going to see a lot of this going forward.