Target Corp. recently acknowledged the presence of "moderating" inflation and highlighted its limited ability to increase prices for essential items. The company believes that this trend could ultimately have a positive impact on sales in the long run, despite lingering doubt from Wall Street.
During Target's third-quarter earnings call, management cited the impact of "moderating inflation rates in essentials and food and beverage." This served as a headwind for financials during the quarter, as the company had relied on price increases to drive sales for over a year. However, Christina Hennington, Chief Growth Officer at Target, remains optimistic. She stated that as prices stabilize for basic necessities, customers will have more disposable income to spend on clothing, home goods, and electronics—areas where demand has been lackluster.
Hennington explained, "In both food and beverage and beauty and essentials, the benefit from average pricing decelerated by about 3 percentage points between the second and third quarters as we moved beyond the period of peak inflation from a year ago." She added, "A lower inflation rate is welcome news as it will reduce pressure on consumer budgets, making room for them to expand back into discretionary categories over time."
Despite these positive sentiments, Target's CEO Brian Cornell emphasized that prices for necessities remain considerably higher than they were before the pandemic. He highlighted that food-at-home pricing for families has increased by 25% overall, with some specific areas experiencing up to a 30% increase. Moreover, parents raising babies face even higher costs—more than 30% increases in baby food and formula, in addition to persistent price hikes in various other categories. These factors, coupled with elevated energy prices, continue to impact discretionary spending.
After revealing strong third-quarter results that surpassed expectations, Target's stock experienced a significant surge of 17.6%. This marks the largest jump in stock value since August 21, 2019, when it rose by 20.43%.
Heading into Uncertain Consumer Trends
Heading into those results, however, expectations were low, as inflation-battered consumers stay cautious on what they buy and as some data points to a slowdown in customer foot traffic. However, Home Depot on Tuesday said “the worst of the inflationary environment is behind us” but added that prices had settled unevenly.
Consumer Caution and Changing Habits
Home Depot's CEO, Cornell, during the call, expressed that customers were still feeling the pinch from higher borrowing costs and the return of student-loan payments. As a result, they were buying fewer things per trip and putting off purchases of colder-weather items like denim and sweaters. While analysts remained cautious, at least one felt that sluggish sales trends had reached a bottom for the company.
D.A. Davidson analyst Michael Baker highlighted that despite the overall weak business trends, the stock should perform better due to low expectations, a low valuation, and the increasing belief that the bottom is in relative to comps.
Target: Caught in a "Consumer Tug-of-War"
As consumers juggle wants and needs, TD Cowen analyst Oliver Chen stated that Target was locked in a "consumer tug-of-war." Consumer discretionary trends remain difficult with home and apparel categories trending down high single digits. Furthermore, factors such as student loans, inflation, interest rates, and lower savings are driving shoppers to make tradeoffs and respond to promotions.
Chen also noted that Target mentioned consumers spending closer to need and negative impacts from warmer weather. These cautious factors may persist but are partially offset by a better inventory spread.
Uncertain Sales Trends and Evolving Consumer Habits
Roth MKM analyst Bill Kirk expressed in a research note that same-store sales trends that were still below 2019 levels remained "uninspiring." Competitors continue to grow, and consumer habits are being reformed. Without consumer/competition shifts, a return to comparable store sales growth is uncertain.
