Target Cautious on Q4 as Consumers’ Available Savings and Credit Dwindle

The country’s third largest retail chain warned investors that, despite unprecedented promotions aimed at reducing excess inventory, its critical holiday sales season would fall short of expectations.

In speaking to investors about its third-quarter results, Target CEO Brian Cornell said the Minnesota-based retailer was bracing for a range of possible scenarios this quarter that would likely lead to a decline in sales.

“Many consumers this year have relied on borrowing or dipping into their savings to manage their weekly budgets but for many consumers, those options are starting to run out,” Cornell said on the company’s conference call. “As a result, our guests are exhibiting increasing price sensitivity, becoming more focused on and responsive to promotions and more hesitant to purchase at full price.”

The news was poorly received by investors who sent shares of Target down by as much as 15% in early trading Wednesday (Nov. 16), marking a 40% decline over the past 12 months, a slump that was in stark contrast to the results and market reaction experienced by rival Walmart the day before.

Demand Shift

Cornell pointed out that similar to what Target has seen in the second quarter, its “frequency” businesses remained strong with double-digit growth in both beauty and food and beverage which he said was offset by persistent softness in its discretionary categories.

Chief Growth Officer Christina Hennington  told investors that value-seeking and promotion-chasing trends “only became more pronounced towards the end of the third quarter when spending patterns changed dramatically, with inflationary food prices absorbing more of [consumer] spending. Those costs are crowding out other categories, including spending on discretionary items, and in some cases, even household essentials.”

Remodel and Redesign

To adapt to a changing consumer and environment Target is focusing on new store concepts that cater to resilient categories like food and beauty products, while remodeling stores around its high level of online orders and in-store pickup, with store concept experimentation also continuing.

“We’ve added nearly 50 Disney shop-in-shop experiences this year, bringing the total to well over 200 of these shops across the country,” Hennington said, adding that Target has “more than tripled” its Apple shop-in-shops since 2021, and the Ulta Beauty at Target store-in-stores concept now has over 350 locations chainwide.

See also: Target and Apple Add Locations and Special Offers to Shop-in-Shop Partnership

On the payments front, Hennington said there’s increased focus on recently launched reloadable Red Cards, “which provide all the benefits of our Red Card debit and credit programs including free shipping and 5% on every purchase, all without the need for a credit check or an existing bank account.”

New Concepts Dovetail With Digital

Chief Operating Officer John Mulligan said remodeling efforts include completing “about 200 fulfillment retrofits this year in which we optimize their capacity and efficiency in supporting our same-day services.”

He noted comparable sales in Target’s digital channel rose 0.3% in Q3, saying “same day services led our digital growth, most notably through our drive-up service, which delivered high single-digit growth on top of more than 80% growth last year.”

Mulligan said new store designs are incorporating “five times more space to support our digital fulfillment services,” adding that tests like the Starbucks drive-up pilot recently launched have been rolled to over 200 more stores.

See also: Target Store Remodeling Plan Adds Space, Pickup Features, Food

“The other emerging capability is the ability for guests to return a purchase through our drive-up service,” he said. Target started testing this last month, and Mulligan said, “Based on the operational success of that initial test, in early November we expanded the service to our guests in that same small set of stores and we’ll look to apply any learnings from that guest-facing tests before rolling out the service more broadly next year.”

Responding to an analyst’s question on digital, Mulligan added that being able to do drive-up returns is a major focus. “We’re testing that in a small number of stores. It just went guest-facing recently. We’ll continue to test that through the fourth quarter here and look to hopefully expand that next year.”

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