Target Sales Are on a Roller Coaster

Target sales have been volatile recently as the iconic retailer tries to regain its former glory.
Equity investors dislike erratic sales, which leads to unpredictable profit margins and free cash flow. These factors raise the risk of owning a stock. Thus, they sold Target’s shares, which closed down 21.41 percent. Target’s stock has been up 10.78 percent for the past five years compared to 88 percent for the benchmark S&P 500 Index.
Management attributes the erratic performance in the company’s sales to a challenging operating environment.
“I’m proud of our team’s efforts to navigate through a volatile operating environment during the third quarter,” Brian Cornell, chair and CEO of Target Corporation, said in a statement accompanying the release of the third-quarter financial results.
“We saw several strengths across the business, including a 2.4 percent increase in traffic, nearly 11 percent growth in the digital channel, and continued growth in beauty and frequency categories. At the same time, we encountered some unique challenges and cost pressures that impacted our bottom-line performance.”
Thus, the operating challenges Target’s CEO mentioned as a source of the company’s erratic sales performance must be unique rather than industry-wide.
Long Island University Post professor of marketing Cathy Black believes Target has lost its mojo.
“There’s nothing new in Target stores these days to hype consumers and bring them to its stores,” she told The Epoch Times.
Then there’s the company’s strategic positioning. Over the years, Target has added discretionary merchandise that caters to higher-income consumers as it tried to become a “one-stop shop.” However, it has yet to attract this class of consumers, as has been the case with Walmart and Costco.
In addition, discretionary merchandise is sensitive to price cuts, which pit Target in direct competition with other major retailers.
“Target’s third-quarter update aligns with our visitation data, which showed a slowdown in August and September, followed by a rebound in October during Target’s Circle Week promotion, and softening again so far in November,” R.J. Hottovy, head of analytical research at Placer.ai, told The Epoch Times in an email.
“The company attributed this softness to discretionary categories, as consumers adopt a more cautious approach to stretch their household budgets. In addition, we’ve observed a highly deal-driven environment in recent months, with consumers responding to price cuts from Walmart and other major retailers.”
Quo Vandis President John Zolidis, a long-time retail sector analyst, attributes Target’s erratic sales to inadequate inventory-cycle management after the COVID-19 epidemic.
“TGT has been a long-term share winner and is a company that enjoys strong margins, cash flows, and returns,” he said in a research note following the release of Target’s third-quarter report, referring to Target’s ticker symbol.
“Unfortunately, following a surge in the business during COVID, the company’s performance has been volatile—the company overbought inventory for fiscal year [FY] 2022 in a misjudgment of the sustainability of demand.  In FY23, inventories were right, but politically charged merchandise assortments upset guests and provoked four quarters of negative same-store sales.  In FY24, the business appeared poised to recover, but this has stalled in third-quarter FY24 with negative comps at the stores, and YOY [year-over-year] declines in gross margins.”
As a result, Zolidis believes Target’s disappointing performance is specific to the business.
“Regardless, flattish comps versus last year’s negative comps [comparables] is insufficient to provide a reason to own or recommend the stock,” he said.
However, Mr. Cornell remains optimistic about the company’s future.
“Looking ahead, our team is energized and ready to deliver the unique combination of newness and value that holiday shoppers can only find at Target, and we remain confident in the underlying strength and fundamentals of our business and our ability to deliver on our longer-term financial goals,” he said.