Image courtesy of Target
November 20, 2024
Can Target Turn Fortunes Around for the Holidays After ‘Biggest Earnings Miss’ in Years?
Delivering what CNBC termed the “biggest earnings miss” in two years via its Nov. 20 third-quarter earnings report, Target attempted to put a positive spin on the somewhat dreary results.
“I’m proud of our team’s efforts to navigate through a volatile operating environment during the third quarter. We saw several strengths across the business, including a 2.4 percent increase in traffic, nearly 11 percent growth in the digital channel, and continued growth in beauty and frequency categories. At the same time, we encountered some unique challenges and cost pressures that impacted our bottom-line performance,” Target CEO Brian Cornell said in remarks attached to the company’s earnings report.
With Target expecting full-year adjusted earnings per share (EPS) of $8.30 to $8.90 — a figure revised heavily downward from the company’s earlier EPS projections of $9.00 to $9.70 delivered in August and short of the $9.55 expected by Wall Street — it appears that the company’s view of the immediate future has become more restrained.
Further, Cornell indicated that rushing shipments in preparation for October’s port strike and softer demand for discretionary items were at least partially to blame for the lingering challenges facing the retailer.
Target shares had tumbled by more than 21% as of 1:30 p.m. ET on Nov. 20 as a result of the news.
Target Projects ‘Flat’ Holiday Season, Despite Optimism From Competitors
In its report, Target indicated it expects flat comparable sales during the fourth quarter, in what CNN described as “a potential warning sign for the retail industry.”
Gesturing toward flagging interest in discretionary sales that Target heavily relies upon — as well as increased competition from large competitors like Amazon and Walmart — CNN reporter Nathaniel Meyersohn illustrated a gloomy portrait of Target’s current struggles.
“But Target has also slumped because of its merchandise mix and higher prices compared to rivals like Walmart. The chain stocks more non-essential merchandise compared to competitors such as Walmart and Costco. More than half of Target’s merchandise is discretionary, making it more susceptible than its rivals to swings in consumer sentiment,” Meyersohn wrote.
In a bid to compete with Walmart, Target has been adding more groceries into its product mix: But is this move too little, too late, especially when going up against an industry leader already heavily invested in grocery offerings?
According to CNBC, Walmart’s grocery items account for approximately 60% of its product mix, while — despite its best efforts to pivot on this score — Target’s grocery lineup represents about 23% of its total product mix.
For its part, Walmart recently announced extremely strong quarterly earnings, with profit ticking upward by 8.2% year-over-year and strong growth in the customer segment earning $100,000 a year or more, signaling a broader consumer base for the blue-and-yellow brand.
Target’s Holiday Strategy: Will It Pay Off?
Target isn’t exactly ready to throw in the towel concerning this year’s holiday sales season, however. It recently launched a series of ad campaigns ranging from the more traditional to humorously contemporary (featuring a “weirdly hot” Santa), and its website boasts an undeniably holiday-infused user interface. “All things Christmas,” a subdivision of its “Holiday Shop” landing page, and its Holiday Price Match Guarantee feature prominently.
Target has also created buzz around its broader holiday experience, promoting a peppermint-swirl aesthetic both in-store and online, as well as creating holiday-themed areas within its locations. A 9-foot-tall Barry the Bear plush is also placed in some locations as a draw for the young and young-at-heart, and pop-up experiences (known as Target Wonderlands) will be taking place in several U.S. cities in celebration of the season.
Target has also improved its supply chain and distribution capabilities as of late. According to The Minneapolis/St. Paul Business Journal, the retailer has added four supply chain facilities this year, two food distribution centers, and an omnichannel “flow center” to improve package handling and shipping times.
Additionally, Target has committed to a price-cutting strategy it introduced in May to carry through the end of the holiday season. In October, the retailer doubled down its attempt to court cash-strapped customers, dropping prices on popular seasonal items such as toys, cold medicine, and ice cream.
By the end of the holiday sales spree, according to the company, it will have slashed prices on more than 10,000 products.
Will these initiatives be enough to improve the company’s fortunes as the year comes to a close? Target’s CEO seemed confident about the retailer’s ability to hold its own this holiday season.
“Looking ahead, our team is energized and ready to deliver the unique combination of newness and value that holiday shoppers can only find at Target, and we remain confident in the underlying strength and fundamentals of our business, and our ability to deliver on our longer-term financial goals,” Cornell said of the company’s seasonal position and future goals.
Discussion Questions
Is Target poised to outperform expectations of a “flat” holiday sales season, and if so, why?
What can Target do to bolster flagging interest from shoppers aware of its brand?
Will Target stock make a recovery over the course of the quarter?
Poll
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Target’s forecast for the holiday quarter is for flat comparable sales. There is probably some deliberate pessimism built into this so the company has room for upside, but this will not be a great holiday for Target. To be fair to Target, its more discretionary-based proposition is a little misaligned with a more frugal consumer mentality. However, it also has to accept responsibility for poor execution across its stores. There’s too much friction from a lack of service at registers and locked up products, too much bad merchandising and mess, too little newness and inspiration in ranges, and a grocery proposition that remains confused. It all adds up to a chain doing itself no favors in terms of generating growth. All that said, Target isn’t a dreadful retailer by any means. It’s just needs to course correct – but I don’t think there is enough time to do this before Thanksgiving, Black Friday and Christmas.
I see the exact same headwinds at Walmart- locked up product, a drive to self-checkout (No cashiers). What I also see at Walmart are stocked shelves, a much more robust grocery assortment, a stronger value perception and… I keep harping on this, outstanding execution of Walmart+. I think the latter has had a lot to do with Walmart’s growth in the higher-income demographics. In my years at Target, we more or less took it for granted that we would win those customers, and we ceded the lower-income demographics to Walmart. And for decades, that was the situation, with very little movement either way. Something changed, and from my perspective, that has to be one of the contributing factors, especially when combined with value and instocks.
My two cents.
A 20%+ decline in stock price is a wild overreaction by Wall Street. The high mix of discretionary goods is partly the reason, but anyone counting Target out this holiday season hasn’t been watching Target over the years. Target’s holiday plans have been baked in for months, and so now it’s a question of executing – and, Target knows how to execute. Heavy discounting is a big part of the play, which will almost certainly drive top-line sales. Profitability may still see some pressure given the heavy promotional activity that Target has already telegraphed. As for the stock price – as they say, under promise and over deliver, and that’s exactly what I believe Target leadership is doing.
No
Little
Of course.
The context was a little lacking in this story, and I didn’t research beyond what appears here – yeah, lazy, but you get what you pay for – but I gather this was an earnings issue more than a sales one; which is to say expenses are too high (that minor part of a company that seems to have been forgotten in the Revenue-is-everything .com age). So while investors, and speculators – those who send a stock down 21% based on a single press release – will gnash their teeth, Target will eventually see happier days.
The other thing to note here is the perils of calling Walmart Target’s “rival”; yes, they are in a literal sense, of course, but the relative difference in scale between them, and the manner in which they are differentiated (IMHO) limit the usefulness of such direct comparisons. To WM, Target is a rounding error; To Target, WM is a store they try to avoid being.
I don’t think Walmart and Amazon are the only competitors. That’s what they have to figure out. Who are they losing share to? I think they’re losing it to TJX, grocers, some Walmart, Aldi and others
I don’t think they really know what’s wrong. The earnings calls always have a new excuse.
they’ll cut prices, buy some sales and then have to explain gross margin shortfalls. So maybe they’ll blame ORC again. I don’t think they have a clue what’s wrong…besides the obvious – the forecasting systems don’t work. But I don’t think they really know who they’re losing share to, or why.
this is a deep and long conversation and I’m not sure the company is ready to do the soul searching required. Too busy creating the next quarter’s story
Companies sometimes intentionally understate expectations in order to present “good news” to shareholders rather than further disappointment, but Target might actually be losing its grip on what defines itself. It needs to be mentioned that more than most retail chains, Target, over the past three decades has defined itself quite well.
Target would be foolish to imitate Walmart as it did in the distant past, as it has never been known for its supermarkets, and unlike Walmart, it does not pack the floor with wall-to-wall merchandise. There is a lot of comfortable “space” at Target.
Target might be intentionally understating expectations so that they can present “good news” to their shareholders rather than more disappointment, but Target, who has done exceptionally well over the years in defining itself, has lost some of its ability to do exactly that.
It would be foolish for Target to imitate Walmart, as it did in the distant past, because Target has never been, and never will be, known for its supermarkets, and unlike Walmart, it never clutters it’s floor with wall-to-wall merchandise. Target affords “space”
Compared to most retailers, Target has excelled at defining itself over the last couple of decades. That business model, however, might be losing momentum, partly because of the economy, pricing trends, and changes in the behavior of competition, especially Amazon.
Target’s customer service appears to be harmed by labor costs and shortages. The stores appear to be understaffed, including at the check stands.
For any retailer, locking products behind a lock and key is a terrible practice, but especially for Target, whose mid-scale shoppers enjoy browsing and comparing. Target’s “experience” is losing its luster.
The ecommerce business of Target is losing some of its appeal in comparison to Walmart and Amazon, which do it better in my opinion.
Target seems overly focused on having a woke sociology, which in my view is a “turn off” to many people.
Instead of stocking commodities and necessities, Target’s business model is to provide its mid-scale consumer base with styles and trends, while Walmart and Amazon are starting to do the same; Walmart, for the first time.
I’ve personally found all this news a bit of an overreaction. There were acute reasons as to why this happened. Target is nimble and a quick learner. I don’t see the brand repeating these mistakes moving forward. One quarter isn’t the end of the world, and I still think they’ll be strong in the holiday mix. That said, Walmart will no doubt also be strong since it’s been able to increasingly capture a newer target for itself- higher income consumers than its usual customers.
No. The die is cast, and has been for many months. They own what they own, whether it’s on the floor or in the warehouse. Marketing is done and queued up on the various channels. Momentum embedded in shoppers perspective is set. They can promo and discount their way to end of season inventory goals, but even then transition product is in the warehouse or on a boat. Based on the two and three year stacked comps, this is not a question of a minor course correction. This situation calls for a strategic reset.
It’s a tale of two cities: As the holiday shopping season gains momentum, Target‘s business challenges and operational issues are Walmart‘s opportunities.
Target cited “lingering softness in discretionary categories” as a top factor in its disappointing third-quarter sales. Many budget-conscious shoppers continue to focus on necessities, and this is the latest sign that discounts will be the driving force this holiday season, as they have been for much of this year.
Value consciousness and good customer experiences matter:
The broader challenge for Target is that it has struggled with retail fundamentals at the store level. Executing optimized merchandising and assortment planning strategies and outstanding customer experiences across physical and digital channels helped propel Target to the top retail ranks. However, aggressive promotional strategies are not a fix-all for broader store operations, customer experience, and product challenges in its vast store fleet. Reducing staffing, limiting the hours customers can use self-checkout lanes, and locking up essential products aren’t helping.
Wait, I thought over-exposure (seriously, 60% at Walmart?) to grocery and its poor margins was an Unalloyed Very Bad Thing, and that Target trying to significantly grow grocery was A Very Dumb Thing. Maybe we shouldn’t listen to the TV stock analysts, after all, CNBC itself is getting sold off.
T1 in Roseville, MN doesn’t have anything locked behind Plexiglas, and the parking lot is packed every day. They need more cashiers and while in-stocks have improved, could still be better. Their endcap game is the best I’ve ever seen & I wish I had more people to buy for except COVID and the aftereffects on healthcare killed them.