Target's Balancing Act: Thriving in a World of Less Discretionary Spending
Target's Balancing Act: Thriving in a World of Less Discretionary Spending
Discretionary spending is down for seven straight quarters. Bad news when over 50% of your sales are discretionary.
In the aftermath of the COVID-19 pandemic, Target encountered a self-inflected dilemma. The retailer misjudged its inventory needs because of a temporary surge in pandemic-era purchases. This created a nearly $2 billion inventory error that disrupted its financials for the year. That issue is behind the retailer, but now it faces macro winds: consumers aren't buying discretionary items at the pace they used to.
That isn't good for Target because over 50% of its sales are discretionary.
"Guests who previously bought sweatshirts or denim in August or September are deciding to wait until the weather turns cold before making a purchase," Target CEO Brian Cornell told investors. "This is a clear indication of the pressures they're facing as they work to stretch their budgets until the next paycheck."
Despite these hurdles, in Q3 2023, Target showed signs of recovery. The company's total revenue was $25.4 billion, a 4.2% decrease from the previous year, partly due to a drop in other revenues. However, there's a silver lining: Target's gross margin rate climbed to 27.4%, up from 24.7%, thanks to improved inventory management and reduced shipping expenses. This operational turnaround suggests Target is overcoming past missteps, even as it navigates broader economic challenges.
The retail industry, on the whole, is facing a downturn in discretionary spending. It's down for seven consecutive quarters. Concurrently, essential items like food have seen a price increase of up to 30% since 2020, straining family budgets.
In this upheaval, Target is emphasizing newness. "You'll see that across the store," Chief Growth Officer Christina Hennington said. "You'll see it as you walk in, first thing in our women's set. It's right on trend; it's colorful. The price points are very appealing." A bit deeper in the store are toys. Right now, 2/3 of all toys for under $25. "We're pleased with the assortment we're putting forward," Hennington concluded.
The New Normal May Be Good (For Target)
Target has experienced a 20% increase in customer traffic over pre-pandemic levels.
Target is actively engaging customers with effective promotions, sustaining a balanced market. Its strong inventory allows it to boost profitable and rational promotions.
Management Claims Shrink is getting lighter
Target faced a 40 basis point challenge to its third-quarter gross margin rate due to increased costs from inventory shrink. Shrink is essentially the cost of loss inventory. Typically this is due to spoilage, theft and administrative errors (mispricing).
Target has been credibly accused of overstating shrink to cover for their previous inventory issues, presumably.
They Said It:
Chief Growth Officer Christina Hennington on how Target will respond to consumer sentiment:
The pressure on the consumer is really real and they're having to make those choices. I also shared in my remarks that in the frequency businesses, which we think of as Food and Beverage and Essentials and Beauty, that in the third quarter we saw prices come down so that we comped over the peak of inflation. The prices came down, that's an industry-wide phenomenon. And as a result, we did see some improvement in unit velocity.
That's a good thing in the long run, is that when consumers can stretch their budget across more things that they want to buy and not have it tied up in any high prices. That's a good thing. But as Brian talked about, the inflation on these categories over the last several years, especially in Food, Household Essentials, even pets and baby, is meaningful. And that's going to take a while to overcome.