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3 retail stocks to watch after Target's latest consumer spending warning

·Anchor, Editor-at-Large
·2-min read
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The home furnishings industry could become awash with much cheaper goods thanks to a second consecutive warning on the health of the consumer from discounter Target.

Target is aiming to cut inventory by offering discounts, canceling orders, and taking a harder look at expenses. The company entered the second quarter with inventory up 43% — including unwanted increases seen in home furnishings — and conceded in its latest earnings report that those levels were too high relative to consumer demand.

Target CFO Michael Fiddelke told Yahoo Finance that the markdowns will be most acute in discretionary categories such as home goods, where consumers have curtailed their spending as they fine-tune household budgets.

And with Target aggressively discounting home furnishings, rivals including TJX Companies-owned HomeGoods, Wayfair, and Williams Sonoma may be forced to follow suit to remain competitive this summer.

In turn, that may place unexpected further pressure on profit margins at these go-to destinations for home furnishings.

Cracks in the armor of these three stocks — pandemic favorites as people renovated their homes — began months ago as sales trends in the category started to slow. So far in 2022, shares of TJX are down 18%, Williams-Sonoma is down 24%, and Wayfair has crashed 70%.

Tepid first quarters from the group did little to encourage dip buyers into the mix: First U.S. same-store sales for HomeGoods tanked 7%; Wayfair's first quarter sales dropped 13.9%; and sales growth slowed at most of William-Sonoma's brand compared to the prior four quarters.

Customers walk by the Williams-Sonoma store in Broomfield, Colorado March 17, 2015. Williams-Sonoma will release their Q4 2014 earnings on March 18.  REUTERS/Rick Wilking (UNITED STATES - Tags: BUSINESS)
Customers walk by the Williams-Sonoma store in Broomfield, Colorado March 17, 2015. Williams-Sonoma will release their Q4 2014 earnings on March 18. REUTERS/Rick Wilking

"Factors contributing to softer demand are largely out of Wayfair's control, including geopolitical tension and a consumer wallet-share shift toward services vs goods," Jefferies analyst Jonathan Matuszewski wrote in a note following Wayfair's results. "As these dynamics normalize and initiatives (e.g. specialty brand curation) show returns, the marketplace should return to EBITDA profitability, though near-term looks choppy."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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