Why Target Is Bracing For A Dismal Holiday Sales Season

Target had a 52% drop in profits and is projecting a 12% dip in earnings for this holiday season because of waning consumer confidence and inflation.

By Charlene Badasie | Published

Target reported a 52% drop in profit for the third quarter, citing inflation and a deteriorating economic outlook for its poor performance. The retailer also lowered its outlook for the holiday season which caused its shares to plummet by 12% in premarket trading. Adjusted earnings also tumbled way below the lowest analyst estimate to $1.54 per share, due to dramatic changes in consumer spending.

“Consumers are feeling increased levels of stress driven by persistently high inflation, rapidly rising interest rates and a sense of uncertainty about their economic prospects,” Target CEO Brian Cornell said via Fox Business. He added that with high rates of inflation continuing to erode purchasing power, people have relied on borrowing or their savings to manage weekly budgets.

But as those options run out, Target shoppers are exhibiting increasing price sensitivity. They are also more focused on promotions and hesitant to purchase at full price. Despite its losses, the retailer’s financial report wasn’t all bleak. Sales of necessities like food and groceries were strong. While, much like Walmart, discretionary categories like electronics and clothing hampered its bottom line.

Now, Target plans to reduce costs by $3 billion over the next three years to simplify and gain efficiencies across its business. The retailer will also focus on reducing complexities. Speaking about the busy holiday shopping season, Cornell said the rapidly evolving consumer environment means the chain is planning more conservatively for the rest of 2022.

The Minneapolis headquartered store forecasts a low-single-digit percentage decline in sales at stores open at least a year, CNN Business reports. Addressing the shopping trend, Head of Retail Strategy at Publicis Sapient, Hilding Anderson said, “This quarter confirms that the middle-class consumer has been hit hard by inflation and is changing the way they spend.”

They are trading down, buying more value-priced goods, and shifting to white-label products. “The shift suggests continued headwinds for the non-value players in big box retail during the balance of this holiday season,” Anderson added. Target’s inventory excess previously forced the company to significantly mark down big-ticket items and canceled pending orders from suppliers to fix the problem.

Interestingly, Target also said it suffered a massive profit loss due to organized gangs of shoplifters who have systematically stolen merchandise from its discount stores. “Incremental shortage has already reduced our gross margin by more than $400 million compared to last year,” Chief Financial Officer Michael Fiddelke said via Yahoo! Finance.

He added that Target expects the continuing theft to reduce its gross margin by over $600 million for the full year. A spokesperson explained that the shrinkage was attributed specifically to organized retail crime. “We know we’re not alone across retail in seeing a trend that has become increasingly worse over the last 12 to 18 months,” Fiddelke said.

As such, Target is taking corrective measures in its stores to curb the trend where possible. However, that becomes an increasing strain on the business and the business of others who are also affected. Meanwhile, shares of the big box department store are down more than 20% for 2022.