Target Corp. on Wednesday became the latest retailer to call out “moderating” inflation and said it had less room to charge more for basics — a trend it said would ultimately help sales over the long term, amid enduring Wall Street skepticism.
During Target’s
TGT,
third-quarter earnings call on Wednesday, management cited “moderating inflation rates in essentials and food and beverage” as a headwind to financials for the quarter, after more than a year of relying on price increases to boost sales. However, Christina Hennington, Target’s chief growth officer, said that as prices eased for basics, customers would eventually have more money to spend on items like clothing, home goods and electronics, where demand has suffered.
“More specifically, 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 said.
“As we’ve said, 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,” she added.
Still, Chief Executive Brian Cornell noted that for now, prices for necessities are still far higher than before the pandemic.
“While we’re happy to see inflation rates moderating this year, if you compare industry pricing in key categories back to 2020, food-at-home pricing for families has increased 25% overall, and in some areas, up to 30%,” he said.
“And if you’re a parent raising a baby, you’re facing increases of more than 30% on baby food and formula, too, and that’s in addition to persistent increases in a variety of other categories,” he added. “So when you layer on the impact of higher energy prices, it all puts pressure on discretionary spending.”
The executives made the remarks after Target’s third-quarter results topped expectations. Shares of Target jumped 17.6% on the results, putting the stock on pace for its biggest jump since Aug. 21, 2019, when it rose 20.43%.
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.
Cornell, during the call, said that customers were still feeling the pinch from higher borrowing costs and the return of student-loan payments and were buying fewer things per trip and putting off purchases of colder-weather items like denim and sweaters. But 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 said that “while business trends remain weak overall, the stock should perform better due to low expectations, a low valuation, and the increasing belief that the bottom is in relative to comps.”
But as consumers juggle wants and needs, TD Cowen analyst Oliver Chen said 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,” he said. “Furthermore, student loans, inflation, interest rates, and lower savings are driving shoppers to make tradeoffs and respond to promotions.
“[Target] also mentioned consumers spending closer to need and negative impacts from warmer weather,” he continued. “We fear these cautious factors may persist and are partially offset by a better inventory spread.”
Roth MKM analyst Bill Kirk said 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,” Roth MKM analyst Bill Kirk said in a research note. “Absent consumer / competition shifts, a return to comparable store sales growth is uncertain.”
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