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Target misses on earnings, inventory up 35% year over year

Yahoo Finance's Akiko Fujita and Brian Cheung break down Target earnings.

Video transcript

BRIAN CHEUNG: Of course, Akiko, Target and retail remaining the big story on this Wednesday.

AKIKO FUJITA: Yeah, yesterday we were talking about Walmart, today it is about Target. Seeing a big miss-- earnings miss in its latest quarter, the retailer saying profit pressure was driven primarily by the company's inventory production efforts. Walking through the numbers here, earnings $0.39 a share on revenue of $26 billion.

And Brian, if you compare it year on year, sales were down 90% from a year ago. But again, we've been talking about the inventory story for some time. In many ways, this was kind of could, you could argue, a necessary quarter for Target who did say, by the way, they're going to move aggressively to slash prices, clear inventory so that they are prepared for the second half of the year.

BRIAN CHEUNG: Yeah, you know, this is a really challenging situation because on one hand, Walmart's story was very much same as Target heading into this week from the perspective that they were guiding in mid-may that look, the inflationary story is going to have to force us into some discounting that's going to hurt our margins. You saw BOAT stocks and a lot of other retail stocks take a spill three months ago, as well. The difference is that Walmart appeared to beat those estimates that they had set earlier in May and then their stock is essentially back where it was three months ago.

But Target very much a different story. They have not had as successful of a-- I guess, let's call last few weeks of their quarter as Walmart did. And what's really concerning is that you saw many mentions on the earnings call of the consumer prioritizing value. For Target, the translation is they're going to have to do more discounting, right, which you imagine is going to be the exact same thing that they were warning about in May, which is profits getting squeezed.

AKIKO FUJITA: I mean, it's worth sort of backing up a bit if we're talking about the inventory story to see how we actually got here. You know, a lot of this was, to your point, shifting consumer habits. It was also about the backlog that we've been talking about for the first half of the year, end of last year as well. A lot of that inventory coming through, suddenly piling on to these retailers at a time when consumers are saying, this is not what we want anymore. And so they have had to take some aggressive moves. That's reflected in the numbers we got from Target. But to your point, they are being compared against what we saw from Walmart yesterday. And those numbers simply weren't as strong.

BRIAN CHEUNG: Yeah. And I think that kind of what's really interesting here is just the overall scene, right? We also got some numbers this morning on retail sales and the numbers coming in from the Census Bureau, saying that retail sales were essentially unchanged from the previous month. And I think that when we talk about the overall story and the appetite of the American consumer to go shop at a Walmart or go shop at a Target, the story from the inflationary angle is still a bit mixed, right? Because on one hand, you want to see strong retail sales because that means that we aren't falling into a sharp recession with economic activity going down the toilet. That's not at all the case from what we're seeing right now.

Certainly, it's flat month over month but not falling or contracting sharply. But at the same time, if you see any sort of stronger than expected retail sales, maybe that says the inflationary story is still very much valid.

AKIKO FUJITA: That's it because that price is baked in.

BRIAN CHEUNG: Exactly. So if you're a retailer like Walmart or Target, that's a really tough thing to forecast because yes, we just got retail sales numbers for the last month. Can anyone say with any certainty what retail sales numbers look like in the future? It's a really tough thing to forecast.

AKIKO FUJITA: Yeah, and of course, we've been watching month on month to see just where inflation is. But even if you compare over the last year, I mean, that-- I think is worth noting 10% gain-- or 10% above levels we saw during the same period last year. By the way, gas station sales were up nearly 40% year on year.