Target has a warning about the holidays

Target’s sales slumped last quarter and the retail giant is predicting a slow holiday shopping season.

Target’s sales tumbled 4.9% — the second quarter in a row sales have dropped. And the company forecast a weak holiday, as customers continue to forgo discretionary purchases like furniture, electronics and some clothing. Target expects sales to decline by mid-single digits this holiday season.

Shoppers have become more cautious in the face of inflation, higher interest rates and the resumption of student loan repayments. Consumers aren’t spending on home improvement projects the way they were during the pandemic, Home Depot said Tuesday.

Retail sales also dropped in October for the first time in seven months, the Commerce Department reported Wednesday.

Despite the sluggish sales, Target’s profit beat Wall Street’s expectations last quarter, and the stock surged 14% in premarket trading Wednesday. Heading into Wednesday, Target’s stock had dropped 36% over the past year.

Wall Street was more focused on Target’s profit last quarter, which grew 36% from a year ago. As shoppers have pulled back, Target has been stuck with an inventory glut. That has hurt its profitability.

But Target’s inventory levels are leaner than they were a year ago and Target is marking down fewer products. Target’s profit also grew from lower freight and supply chain costs.

After a half year of negative headlines, culture war distractions and a massive stock slump, Target finally had something to cheer.

Target’s struggles

Target’s quarterly sales fell for the first time in six years over the summer as consumers pulled back on discretionary goods and fierce right-wing backlash to Target’s Pride Month collection took a toll on the brand.

Target was one of the strongest-performing retailers during the pandemic as consumers flocked to stores and its website while stuck at home. But Target has slipped as consumers change their spending patterns.

Target (TGT) is over-exposed to non-essential merchandise compared to competitors such as Walmart (WMT) and Costco (COST). More than half of Target’s merchandise is discretionary – clothing, home decor, electronics, toys, party supplies and other non-essentials. The company in recent years has added more food and essentials to its stores.

Store theft and safety have also become bigger concerns at Target.

Target said last month that it’s closing nine stores in major cities specifically because “theft and organized retail crime are threatening the safety of our team and guests, and contributing to unsustainable business performance.”

But Target’s recent store closures in New York, San Francisco, Oakland, Seattle and Portland may also be due more to the underperformance of Target’s smaller store locations, analysts say.

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