Target Cuts Q4 Sales, Profit Guidance on Drop in Discretionary Spending

Target scaled back guidance for revenue and profit in Q4, citing “dramatic changes in shopping patterns” at the company and industrywide. “We believe it’s prudent to plan for a wide range of comparable sales outcomes” in Q4 that center around a low-single-digit comp decline, Fiddelke said. The “most sensitive input” for its operating margin rate projection of 3% is “the level of demand for our discretionary businesses.”

CEO Brian Cornell cited a change in shopping behavior in the back half of October that has continued into November. General merchandise categories shrank by 14% in the first week of November, “a very significant change in shopping behavior," he said, citing NPD data. Cornell noted food and beverage prices are up in some cases by double digits, affecting budgets for discretionary items. Those consumers who are shopping for discretionary items are looking for “a great deal at a great value.”

Fiddelke referenced “greater markdown pressure from Q4 promotions, given the increase in price sensitivity” shoppers have shown recently. “We’re planning for additional pressure from inventory shrink, given the worsening trends that have emerged so far this year," he said.

Comparable sales grew 2.7% for the quarter ended Oct. 29, consistent with comparable sales growth in Q2, but “we saw a dramatic change in the pace and composition of our business toward the end of the quarter,” Fiddelke said. Comp sales grew 2.8% in August and 4% in September, but dropped 0.9% in October, he said. A dramatic change in sales pace after Target Deal Days promotions in early October drove a high single-digit sales bump, Fiddelke said. The last three weeks of October had a low single-digit decline in comp sales with nearly all the slowdown driven by discretionary categories: hardlines, apparel and home.

The 24.7% gross margin rate in October was about 3 points higher than in Q2 but came in “far short of our expectations,” Fiddelke said, citing “a higher than expected markdown impact from promotions” as consumers concentrated spending on discounted items later in the quarter. Target anticipated a highly promotional environment this fall, “given the excess inventory we’ve been seeing across retail,” but the “enhanced focus on promotions reflects an increasing level of stress on consumers.”

Supply chain improvements occurred faster than expected in the quarter, said Chief Operating Officer John Mulligan, causing many overseas orders to arrive “earlier than needed.” The company is cutting lead times on future orders, he said. To prevent early arrivals into the distribution and store network before they’re needed, Target has put in place strategies to segment shipping containers as they arrive at ports, he said.

Inventory, while healthier than earlier in the year, is bloated due to the early arrival of fresh inventory, Mulligan said. By early November, about 90% of Target's key Q4 programs had already moved into distribution centers and stores vs. just over half a year ago amid supply chain disruptions, he said.

Transportation costs improved in the quarter, though they remain above pre-COVID-19 levels, Mulligan said. Container rates in global shipping are down by a third from peak pandemic levels; the retailer will renegotiate staggered contracts next year with shipping partners, he said. Target expects further reductions going forward, with rates still about three times those of 2019. Domestic transportation rates, double those of 2019, are also coming down, he said.