Economy rebounds in third quarter, but outlook sours

Target’s comments cloud retail holiday outlook

According to the National Retail Federation (NRF), America’s retailers entered this year’s holiday shopping season with a sense of cautious optimism. Earlier this month, the NRF forecast that sales this holiday season — the 61 calendar days in November and December — would increase by 6%-8% over 2021 to between $942.6 billion and $960.4 billion. This was below last year’s growth rate of 13%. Still, the NRF hoped that shoppers would find a way to muscle through soaring prices to deliver a respectable holiday season for the retail industry.

But on Wednesday, Target—the nation’s seventh-largest retailer—delivered a cautionary shot across the bow for the retail holiday outlook. Target reported that its profits in the July-September third quarter fell by a massive 52.1% over the past 12 months. In response, its management lowered their revenue and earnings expectations for the current fourth quarter, which includes the holiday shopping season. Target also announced plans to cut $2 billion to $3 billion in total costs over the next three years.

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Moreover, Target also provided a cautionary outlook for the broader retail industry. The company stated the industry has now entered “a period of rapidly softening demand and elevated uncertainty.” Target Chairman and CEO Brian Cornell noted that consumers are now facing a punishing combination of “persistently high inflation, rapidly rising interest rates and an elevated sense of uncertainty about their economic prospects.”

Target’s recent woes serve in stark contrast to those of Walmart. On Tuesday, Walmart — America’s largest retailer — likewise reported its third-quarter earnings. Walmart surprised Wall Street by announcing better-than-expected revenues and profits while raising its expectations for the fourth quarter. But why such a difference in financial results and outlook between these two retailing giants?

Upon closer look, much of Walmart’s strength in the third quarter came from its grocery operations. Walmart offers low-priced groceries through both its branded in-house stores as well as through Sam’s Club, which it owns. In fact, groceries account for 56% of Walmart’s total sales. Based on revenue, Walmart is actually the nation’s largest grocer. Comparatively, groceries drive just 20% of Target’s sales.

In the third quarter, budget-conscious shoppers flooded its Sam’s Club outlets in search of cheap groceries and its member-discounted gasoline prices. Third-quarter sales at Sam’s Club rose a highly-robust 12.7% over the past year as membership in the discount club surged to a record high.

It’s easy to understand consumers’ sensitivity to food and gas prices. According to the latest Consumer Price Index, food prices have risen by 10.9% over the past 12 months. Many individual food items such as chicken (+14.5%), eggs (+43%), milk (+14.5%) and margarine (+47.1%) have seen their prices soar even higher. The price for a gallon of regular gas has increased by 17.1%.

There are still six weeks left in this year’s retail holiday shopping season. Whether Target’s sudden-gloomy outlook holds true or not is yet to be seen. The final sales numbers for this year’s season won’t be fully known until mid-January, at the earliest. In the meantime, retailers are hoping that inflation-weary shoppers can somehow find a way to deliver a successful holiday season.

Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the US Securities Exchange Commission.

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