Target earnings: ‘We’re seeing the consumer exhale’ on inflation, analyst says

Jefferies Managing Director Stephanie Wissink joins Yahoo Finance Live to discuss Target earnings, what to expect from ULTA earnings and cosmetics companies, consumer behavior, and value-hacking at club wholesale stores.

Video transcript

- Target missing the bullseye in its latest quarter. The retailer's earnings missed analysts' estimates by a shocking $0.34. And the stock is selling off. Let's get right to Jefferies analyst Steph Wissink for more here. Stephanie, good to see you, as always. Just off that earnings call, did Target offer any hope to investors here? That earnings miss, that's a tough one to swallow.

STEPHANIE WISSINK: Yeah, it was hard to see, actually, just the headline number missing so far off of the bull's eye, as you said in your opening. I think that the struggle here is understanding how their expectations for the back half are unchanged. There is some inventory that's hanging over into the third quarter. So the way in which the model is going to come out is that Q3 numbers are going to come down, Q4 is going to go up, kind of hold the back half of the year constant.

They did use a lot of really bullish language around their ability to navigate this excess inventory and their confidence in the consumer and the consumer's ability to spend. That being said, the CFO did put a little asterisk and said, if there is risk, it's to the downside. So I think the shares are reflecting some of that caution today. And also, if you look at their comps, they were below expectations. But they were entirely driven by traffic. So that basket structure is now starting to become a headwind. No real strength in the basket. Pricing up, of course, but units down. So very clear sign that the consumer is making some discriminate decisions when they build their basket at Target.

- Steph, I'll leave you out of this one because you make a ton of right calls. And as far as I'm concerned, you're always right. But on Target, a lot of your analyst peers, why are they not modeling Target accordingly? What's going on here? A $0.34 miss, I mean, that's a lot to just take in. And it doesn't happen normally at all.

STEPHANIE WISSINK: It doesn't. And I think you raise a really interesting point in terms of contrast. We had Target that double profit warned really quickly in sequence and ultimately came in below their expectations. So the way the back part of the quarter played out, the burden of that inventory ended up being a bit more than they would have anticipated. Then you have the contrast in terms of timeline with Walmart where they lagged the second profit warn then came in actually better than their expectations.

So right now, it does feel like this is such a week to week combat question. How is the consumer pivoting? How is the consumer changing? What's the trend line? And I do think time needs to pass to understand what is the real underlying fundamental basis for all of our back half estimates.

Right now, it feels very shaky to be making assumptions that the consumer is going to rebound in the fourth quarter. So our standing expectation is more about stability to moderate erosion in consumer spend and more promotionally stepping into the retail environment. But it's just interesting to see in contrast how two very like companies using a different chronology came up with different outcomes and one missed and one beat. So I do think some of this is estimation. But some of it is just timeline and clarity.

- Well, the combination of a promotional mix or promotional period combined with the gas prices that we've seen continue to drop for, what, 60 days or something like that. As of this point in time, do you believe that there is going to be enough of the conviction among the consumers to get back into some of the discretionary spending habits? Or is this a longer term decision that the consumer is signaling about where they're tightening some of those dollars?

STEPHANIE WISSINK: Yeah, Brett. Great question. I think we are seeing the consumer exhale. There was a little bit of a gasp when we started to see inflation popping up into the double digits and into the teens from a food and fuel perspective. And fuel prices are still up almost 30% year over year. So it's still a crunch in the budget.

But I do think we're seeing a little bit of relief in the very recent weeks that consumers are finally able to exhale, spend a little bit more into those areas of wants, but they're also still facing much higher grocery bills. So depending on where you are in that consumer continuum, I think you're going to see a little bit of relief. But I don't think this is the real white flag relief that we would need to see to get very constructive on consumer spending up into discretion.

- Steph, one positive here. I asked Target CEO Brian Cornell how the new Ulta stores are doing. He struck a very bullish tone on how these new stores and locations are doing. More broadly, is makeup coming back? What are you seeing in terms of sales? And what companies are winning?

STEPHANIE WISSINK: Yeah. The data on beauty actually for the summer seems really strong. Now, there is a caveat there. We have been in a very underperforming environment for makeup for the last two years. And it did lag in returning. So fashion kind of came back first, then makeup followed. But we are coming back up to grade to 2019 levels.

And I would say the positive is that we're returning. The negative or risk here is that it's a summer swell and that a lot of the spending is tied to occasions, return to office, leisure activities, social activities, travel. And we need to see that sustain in order to be really confident that all this incremental square footage is going to be able to be absorbed. The interesting factoid here is that Ulta, in total, their square footage is going to be replicated through all of these partnerships.

So Ulta at Target, Sephora at Kohl's, Space NK at Walmart. We are going to effectively have to open another $10 billion specialty beauty retailer over the course of three years to absorb the footage. So we're watching this closely to see how the consumer shifts around. It seems right now that the Target consumer is finding those brands at Ulta that they-- excuse me, the Ulta at Target that they love. And a good solid number. A million and a half consumers that have combined their Ulta Beauty and their Target loyalty program. So that's a decent start. Decent start for that partnership.

- Stephanie, while we have you, you know I love to ask about the bulk companies that are out there, the bulk retailers. And maybe I'm just fascinated with the free samples. But that aside, I have to think about the amount that they're spending right now just to actually see the level of sales that we've seen. We saw that in Walmart, Sam's Club. Of course, they had a great quarter. However, they spent, what, twice what they had spent last year almost just to get that type of revenue figure. And that impacts margins at the end of the day. How much is that going to continue to be a cash crunch for whether it's the Sam's Club within Walmart or whether it's a Costco or a BJ's in this broader bulk category.

STEPHANIE WISSINK: Yeah. I think the broader bulk category to me is a corollary or an index for value hacking. This consumer is very smart. They understand that buying in bulk takes down the average price per consumable unit. They're very aware of it. And I think they see this as an opportunity to save. Even though the overall ticket value is higher than what you would pay as a single unit item at a traditional grocery store, on a per unit basis, it is still savings.

So this is an orientation for the consumer that I think is a long time in the making, this notion that they think they can arbitrage or value hack the retail system. And club is one of the ways to do that. Increasingly, we're also seeing Target and Walmart and others introduce bulk sections into their traditional stores. So I think there's an acknowledgment that the consumer likes this shopping in bulk.

And when they have the fungibility in their wallet to spend on bulk, they are seeing it as a way to hack the value system. And it is. And I think Costco, BJ's, Sam's Club, all of those companies have seen extremely strong comps through the pandemic and still strong comps lapping now on a two to three year basis would suggest to us that there's real permanent consumer change.

- Jefferies analyst Stephanie Wissink. Always a pleasure to get some of your insights. Thanks so much for joining us here today.