It could have been worse, and it’s not like Wall Street expected much anyway.
In short, this is Target’s third-quarter earnings as of Wednesday morning.
After nearly two years of brutal results due to execution errors, rising retail theft and increasingly cautious consumer sentiment, Target has crushed analysts’ lowered estimates for sales, margins and profit. The stock rose over 14% in premarket trading.
Target Chairman and CEO Brian Cornell, speaking to reporters, pointed to a “resilient” consumer who manages to endure numerous financial headwinds, from student loan repayments to nagging inflation.
But the caution in the conference call — and in Target’s EPS forecast for the holiday quarter — was palpable.
“Our research focuses on issues of uncertainty, caution and budget management,” Cornell said. “Consumers are still applying pressure as higher interest rates, higher credit card debt and lower savings rates mean they have less discretionary income, forcing them to make compromises.”
Cornell added: “For example, we’re seeing more consumers delay their purchases until the last moment, such as guests who previously purchased sweatshirts or jeans in August or September but are now waiting until the weather turns cold.”
The earnings report
Net sales: -4.3% YoY to $25 billion versus estimates of $24.9 billion
Gross profit margin: 27.4% versus 24.7% a year ago, versus estimates of 26.6%
Diluted EPS: +36% YoY to $2.10 versus estimates of $1.47 (Guide: $1.20-$1.60)
Comparable sales: -4.9% year-on-year (last year it was up 2.7%):
Inventory fell 14% year-over-year, driven by a 19% decline in inventory in consumer goods categories such as apparel and home goods.
The company again did not repurchase any of its shares during the quarter, despite having $9.7 billion remaining under a prior repurchase authorization.
Both the number of transactions and average check size declined in the quarter.
Fourth-quarter earnings per share are expected to be in the range of $1.90 to $2.60, compared to estimates of $2.23.
The story goes on
Macro Snapshot: Consumers Struggle to Pay Back Student Loans
Shoppers leave a Target store during Black Friday sales in Brooklyn, New York, U.S., November 26, 2021. Portal/Brendan McDermid (Brendan McDermid / Portal)
In addition to sharply higher interest rates and stubborn food price inflation, consumers were dealt another blow in October – the return of student loan payments.
More than a month later, the new dollar outflow appears to be weighing on buyers’ purchasing decisions.
About 40% of people with student loans expect spending cuts, according to a survey of 1,500 consumers conducted by Wedbush analyst Tom Nikic. The average amount owed by this cohort is between $0 and $50,000, per Wedbush.
The categories most commonly cited as areas of spending declines were restaurants, apparel and electronics.
Some of the retailers most at risk of a spending slowdown are discretionary companies like Williams-Sonoma (WSM), Wayfair (W) and Best Buy (BBY), Nikic said.
Meanwhile, a new survey from Morgan Stanley found that only 35% of federal student loan holders plan to spend more on holiday shopping, compared to 43% last year.
“It’s not just one [economic] Factor. [Consumers] have been feeling higher prices for food and drinks for several years. I talked about the fact that food and drinks are average [prices] have increased by 25%. And although inflation was moderate, these price increases remained very persistent. Interest rates are also rising, student loans are under pressure and credit card balances have increased. So I think the American consumer has a handle on all of these components. “But we continue to see a very resilient buyer who has their budget under control,” Cornell added on the call with reporters.
Brian Sozzi is Editor-in-Chief of Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email [email protected].
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