Online Shopping Dominates Holiday Sales Results so Far

Target shares jump after retailer posts a big earnings beat, even as

sales fall again

Target shares jump after retailer posts a big earnings beat, even as sales fall again

Target exceeded Wall Street's sales expectations and surpassed earnings estimates in its latest quarterly report. The boost in performance was driven by robust sales in high-frequency categories like food and beauty, compensating for softer customer spending in other areas. The positive results led to a more than 15% surge in the company's shares during early trading, partly reflecting a rebound from the stock's earlier decline this year.

Despite this success, Target grappled with familiar challenges that have persisted over the past year. Consumer spending remains conservative, primarily focused on essential purchases. Price sensitivity continues to be a significant factor, with shoppers seeking lower prices. Additionally, there's a trend of delayed purchases, with customers waiting for specific conditions, such as a drop in temperature, before buying items like jeans or sweatshirts. Target's CEO, Brian Cornell, addressed these challenges during a call with reporters, acknowledging the ongoing complexities in the retail landscape.

Target faced a consecutive decline in comparable sales for the second quarter in a row. The industry-standard metric, known as same-store sales, adjusts for the impact of store openings, closures, and renovations. During a call with reporters, Chief Financial Officer Michael Fiddelke emphasized the company's determined focus on turning both traffic and sales back into positive territory. However, Fiddelke and Target's leadership team cautioned that achieving this turnaround won't be feasible within the current year, even with the anticipated influx of holiday shoppers seeking decorations, gifts, and more. In the fiscal third quarter ending on October 28, Target reported the following results, contrasting with Wall Street's expectations based on an analyst survey by LSEG (formerly known as Refinitiv):

• Earnings per share: $2.10 vs. an expected $1.48
• Revenue: $25.4 billion vs. an expected $25.24 billion

As the retail industry experiences a deceleration in consumer spending due to heightened prices, with individuals opting for experiences over purchases, Target finds itself grappling with these trends. The company, known for its focus on clothing, home goods, and impulse buys, faces particular pressure amid the changing consumer landscape. Target has encountered its own set of challenges, including controversy over its Pride month merchandise, which it has traditionally sold for over a decade. Additionally, it has contended with elevated levels of organized retail crime and the recent closure of nine stores in major cities, citing theft and threats of violence as reasons. The impact on Target's stock has been substantial, with a nearly 26% decline this year as of Tuesday's close. The company's value has been slashed by more than half since the peak of the Covid pandemic. In the fiscal third quarter, Target reported a decrease in total revenue from $26.52 billion in the same period last year. Comparable sales witnessed a nearly 5% year-over-year drop, primarily attributed to reduced purchases of discretionary items. Digital sales also experienced a 6% decline compared to the previous year. While discretionary categories continue to face challenges, Chief Growth Officer Christina Hennington highlighted on the call that trends have "improved markedly" compared to the fiscal second quarter. She credited this improvement to the introduction of trendy merchandise, such as Target's new kitchenware brand, fall fashion apparel for women, and jewelry from its collaboration with Kendra Scott.

Despite facing sales challenges, the major retail player demonstrated positive strides in rebuilding its profits. In the fiscal third quarter, net income surged approximately 36%, reaching $971 million, or $2.10 per share, compared to $712 million, or $1.54 per share, in the same period the previous year. Target anticipates the upcoming holiday quarter to exhibit a similar trajectory, with comparable sales expected to experience a mid-single-digit decline, and adjusted earnings per share projected to fall within the range of $1.90 to $2.60. However, it's essential to note that the substantial earnings gain in the third quarter is partially a result of weaknesses in the year-ago period, marked by order cancellations and deep discounts to clear excess inventory. Chief Financial Officer Michael Fiddelke attributed the improved profits not to robust sales but to enhanced management of inventory and expenses. Inventory levels decreased by 14% at the end of the quarter compared to the same period last year, reflecting the company's effort to streamline operations and reduce excess merchandise. Fiddelke emphasized the efficiency that comes with reduced inventory, noting that both stores and distribution centers operate more effectively when unburdened by excess stock. While making progress in inventory management, Target is now focusing on boosting sales during the crucial holiday quarter. To kick off the season, Target has already launched Black Friday deals on its website. However, CEO Brian Cornell cautioned that it's premature to assess early holiday sales, stating that the company is "watching the trends carefully." To stimulate sales during the festive season, Chief Growth Officer Christina Hennington revealed that the retailer will leverage new and exclusive merchandise, including a variety of gifts priced under $25.