TargetThe stock ‘s tumbled to a 52-week low on Wednesday, the day after Walmart Shares rose to all-time highs – as rival retailers’ earnings reports again underscored how performance has diverged.
Target posted its biggest earnings in two years and cut its forecast. The company said about the “deceleration in discretionary demand” and blamed the higher costs of the rush to move inventory ahead of the short-lived port strike in October.
In the company’s earnings call, CEO Brian Cornell described US consumers as “shopping carefully as they work to overcome the cumulative impact of years of price inflation” and hold on to the best deals.
Walmart, on the other hand, raised its one-year forecast. He said he’s gaining upper-income shoppers and is seeing better trends for sales outside of the grocery department, even as consumers look for value.
Customer traffic gains are similar at the two stores, but Walmart’s sales trends seem to be better than Target’s. Walmart’s traffic growth outpaced its competitors, with a 3.1% gain at Walmart US versus 2.4% at Target. Walmart’s same-store sales rose 5.3%, while Target’s rose just 0.3% year-over-year. Walmart’s U.S. e-commerce sales rose 22%, a larger increase than Target’s nearly 11%.
The stark differences between the two big-box retailers — and how their businesses operate against a similar economic backdrop — reflect where consumers are willing to spend and where they’re pulling back as customers remain selective about their spending. The stark differences between the industry’s winners and losers could become more pronounced as retailers enter the most important sales season of the year.
Michael Baker, a retail analyst at DA Davidson, said Target’s disappointing results reflect the company’s performance rather than consumer health.
“It’s as simple as this: They lose their stock,” Baker said. “They’re losing out to Walmart, Amazon and Costco.”
He said Target’s inconsistent results over the past year are a warning sign of execution. The company has missed Wall Street’s quarterly sales and earnings expectations in two quarters and beat it in two others.
“That kind of back-and-forth makes you think something’s going on internally,” he said.
Several equity research analysts, including Citi Research, Deutsche Bank and HSBC Global Research, downgraded Target shares on Wednesday, citing concerns that the Minneapolis-based retailer has lost shoppers and sales to competitors. The stock was down more than 20% in Wednesday trading.
In a research note, Paul Lejuez, a retail analyst for Citi, said the company’s poor results and weak outlook indicate Target is “likely to lose share” to Walmart and risks losing markets other than promotional sales.
One root of Target’s problems is the company’s merchandise mix, said Kate McShane, a retail analyst for Goldman Sachs. About 60% of Target’s sales come from select items, such as home goods and clothing. That’s the opposite of Walmart, which generates about 60% of its sales from everyday necessities, such as groceries and household items like paper towels.
That discretionary category, which customers sometimes drop in or out of, “explains some of the volatility and bumpiness that you see that’s more specific to Target,” he said.
Both Walmart and Target cited the negative impact of the port strike, but Target seemed to blame the main part for the weak quarter on the stoppage.
DA Davidson’s Baker said weak sales could “make such cost increases possible.”
Target has other questions that will factor into the future, including who will lead the company. Cornell, who has been chief executive since 2014, agreed in September 2022 to remain at the helm of the company for another three years.
In a call with investors on Wednesday, Cornell pointed to “green shoots” in the business, despite disappointing sales results. He talked about the growth in customer traffic, the benefits of online sales and the relative strength in clothing sales, although the unseasonably warm weather prevented shoppers from purchasing clothing for cooler temperatures.
But on the same call, some analysts questioned Target’s plans for the future. UBS equity research analyst Michael Lasser questioned whether Target should make changes or invest more in its business.
Cornell said the company will stick to what it has been doing: offering unique items and national brands, opening new stores, expanding its advertising business and offering more ways to shop online.
“We’re going to continue our current strategy, stay aligned with consumers and make sure Target is doing the things that consumers across America want,” he said.
