(CNN) – Target just showed how quickly things can change in the retail world, posting a bad quarter after nearly two years of high earnings and record revenue growth. However, the big retailer promises that things will turn the other way just as quickly.
Target was widely seen as one of the winners in the pandemic, gaining new customers as shoppers who didn’t want to go to physical stores were drawn to the increased curbside pickups and deliveries.
But after a disappointing fiscal first quarter when earnings fell 40%, the second quarter was worse than Target. Profits are down 90% compared to the previous year.
Tired of inflation, shoppers have chosen to purchase essentials like groceries and gasoline over “non-essential” general merchandise that is critical to Target’s sales and profits. It was a stark contrast to larger competitor Walmart, which posted a slight drop in profit for the quarter.
Despite this, many analysts believe Target is still well positioned for the future, and is not in danger of joining some of the other pandemic winners now struggling, such as online retailer Wayfair. It announced Friday that it had to cut 5% of staff due to very rapid expansion during good times.
Target’s decline in profits stemmed from the steep discounts it had to offer on many of its general merchandise, including clothing, electronics and household items. The impact on profits from such a large discount was inevitable. However, company executives insist it was the right choice.
“Consider the alternative: We could have held the excess inventory and tried to manage it slowly, over several quarters or even years. While that might reduce the short-term financial impact, it would have slowed our business over time,” CEO Brian Cornell explained to investors. . “The vast majority of the financial impact of these stock actions is now behind us.” A significant improvement in operating margin rates is expected in the autumn season.
Many analysts agree that Target did the right thing by hitting it. Many say that the sudden change in consumer buying habits was not due to miscalculation on the part of management.
“Over the past year, the supply chain has been very tight. Stores were out of stock on many items. They were ordering at a demand level that was very reasonable,” said Bobby Griffin, Raymond James retail analyst. “So there has been a very rapid change in consumer behavior.”
Griffin said discretionary purchases by consumers have shifted from merchandise to things like travel.
Other experts say Target Management hasn’t been entirely innocent of getting caught up in too much incorrect inventory.
“My feeling is that this [problema en Target] 70% was due to consumer behavior and 30% due to stock-related miscalculation,” said Eric Schaefer, chief investment officer at Los Angeles-based private equity firm The Patriarch Organization.
There is some hope for all retailers to take advantage of the significant and steady decline in gas prices over the past two months.
The national average price of gasoline has fallen $1.11, or 22%, to $3.91 since hitting a record $5.02 on June 14. It’s been down every day since then. This would save families $100 a month on average. Wholesale gasoline futures point to lower gas prices in the coming weeks and months.
Owen Chen, a retail analyst at Cowen, said Target has always had a bigger problem with a sudden shift in consumer spending than Walmart, which gets more than half of grocery sales, while Target is close to 20%. Walmart also had to deliver sales on its non-essential general merchandise in the quarter.
Walmart has always been competing more for lower prices, an advantage at a time when middle- and upper-income shoppers are wary of higher prices. Walmart executives reported that they saw more business from those high-income families last quarter, a statement that encouraged their investors.
For Chen, though, the numbers suggest they’re not getting those high-income shoppers out of Target’s traditional customers.
“I think the traffic numbers [de la tienda] Target shows they have done a good job of retaining customers,” he said. The number of customers who made purchases at Target increased 2.7% year over year in the quarter just ended. That’s a 20% increase over the same period in 2019, before the pandemic.
Target’s stock has underperformed some of its competitors, down 28% so far this year, compared to a drop of just 5% at Walmart. Schaefer said he wouldn’t be surprised if Target’s stock continues to fall, because he thinks it’s overvalued by as much as 30%. However, he does not believe that this means that the target is in a bad position for the future.
“I’ll stay on the track,” he said. “The pace of growth during a pandemic will never be sustainable. It will continue to grow, but not at the same pace.”