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U.S. retail sales rose 1.3% month on month in October, despite inflation. With that number in mind, Target released third-quarter numbers on Wednesday, and they run a bit counter to the overall message.
The big-box giant’s sales grew by 3%, but the company missed profit expectations, and its leadership is warning of a soft holiday season. So what can that tell us about the overall economic outlook for retailers heading into the holiday season?
Target’s revenue grew by 3.4% from this time last year — still growth, just “well below expectations,” as the company’s CEO Brian Cornell put it to reporters this morning.
“In some ways, Target is a microcosm for what’s happening in retail,” said Neil Saunders, managing director at GlobalData, a retail research firm. “The sales line is still growing and it’s growing after a very long period of growth at Target. However, growth is certainly slowing, and the bottom line is very, very pressured, and margins are down.”
Margins are down, Saunders said, because of what people are spending on. These days, a lot of Target’s sales are coming in the form of food and grocery staples and not as much in apparel and home goods, where the margins are better.
“In all our data, we’re seeing people who shop at Target saying, ‘Just in case, I maybe won’t spend as much’ or ‘I won’t go as often,'” he said.
Or at all. Instead of buying groceries at Target, shoppers pressed for cash might choose to go to Walmart or the Dollar Store. That’s according to Wendy Liebmann, CEO of WSL Strategic Retail.
“So it’s not necessarily that people don’t want to be there, it’s that they spend too much money sometimes when they’re there,” she said.
Target has doubled down on improving the layout of its brick-and-mortar stores in order to entice more discretionary spending, Liebmann said.
Most of Target’s sales still happen in person, said Sonia Lapinsky, who covers retail at AlixPartners. But renovations and staffing are expensive.
“They know that consumers want to go into the store. They’re improving the experience and they’re giving more of these services, but all of that comes with a cost,” Lapinsky said.
Target is preparing shareholders for a slower-than-hoped-for holiday season, she added, because that firm knows its core clientele pretty well. And it also figured inflation won’t magically go away before people start buying presents.
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