(CTN News) – Despite an increase in sales, Target reported a 52% decline in profits this quarter as it cut prices on clothing and other goods to attract Americans squeezed by inflation.
The Minneapolis retailer expressed caution about its fourth quarter sales and profit.
As part of the company’s cost-cutting efforts, Target plans to save $2 billion to $3 billion over the next three years. Neither layoffs nor hiring freezes are planned as a result of the cuts.
It was in the latter weeks of the most recent quarter, which ended Oct. 29, that Brian Cornell, chairman and CEO, said that sales and profit trends had slowed significantly.
Customers waited for deals on discretionary items or traded down to private brands due to the continuing impact of inflation, rising interest rates, and economic uncertainty. The result was third-quarter profits below expectations, he said.
Target Corp. shares fell 10% before the opening bell.
Consumers are stressed in this environment. We know they are spending more on food and beverages and household essentials. And as they shop for discretionary categories, they are looking for that great deal,’ he said.
This mindset will continue throughout the holiday shopping season, Cornell said.
Target’s disappointing quarter follows a 90% drop in profits for the fiscal second quarter and a 52% drop in the fiscal first quarter. Due to a pronounced spending shift by Americans during the early part of June, Target announced it would cancel orders from suppliers and aggressively reduce prices.
Suddenly, people began spending more on dining out, movies, and vacations than goods for their homes, like TVs and small appliances. As inflation rises, discretionary purchases like new clothing become less affordable. Retailers’ profits have also been hit by the switch since general merchandise has a higher profit margin.
The disappointing performance came after several quarters of stellar profit and sales results for Target.
Earlier this week, Walmart raised its earnings outlook for the full year and reported higher sales in the third quarter of its fiscal year.
The company posted net income of $712 million, or $1.54 per share, in its third quarter. The year-ago period saw $1.49 billion, or $3.04 per share. According to FactSet, analysts had expected $2.16 per share.
A year ago, the company reported revenue of $25.65 billion, an increase of 3.4% from $26.52 billion in the current quarter. According to FactSet, sales exceeded estimates of $26.41 billion.
A comparable sales – those that come from stores and online – was followed by 2.7% growth in comparable sales.
In contrast to weak discretionary sales, beauty, food, beverages, and household essentials drove the business.
The operating income margin rate in the third quarter of 2022 was 3.9%, compared to 7.8% in the third quarter of 2021. As a result of higher markdowns, theft, and merchandise and freight costs, the company reported lower profits.
Considering the softening of sales and profit trends late in the third quarter and into November, it would be prudent to plan for a range of sales outcomes in the fourth quarter.
A low-single-digit decline in comparable sales is now expected for Target’s fourth quarter. Likewise, it expects operating margins to be around 3%.
It announced in August that it would continue to forecast low- to mid-single-digit revenue growth for the full year. Also, it expects operating margins in the second half to be around 6%.