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11/16/2022

Target’s Q3 profit plunges, sales slow; to cut up to $3 billion in costs

Marianne Wilson
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Target plans to cut $2 billion to $3 billion in costs during the next three years.

Target Corp.’s third-quarter profit took a big hit as it worked to clear excess inventory and sales softened ahead of the holiday season, causing the retailer to cut its fourth-quarter outlook.

The discounter said it plans to cut $2 billion to $3 billion in costs during the next three years through a company-wide effort to gain efficiencies across its business, with a focus on reducing complexities and lowering costs. The cuts will include layoffs, according to executives.

These savings will support the company’s investments in driving deeper guest engagement and long-term growth while also delivering on its profit goals,” stated Target, which will release more details about the cost-cutting initiative at its annual investor day in March.

Target’s plan to cut costs comes a week after it unveiled a larger-store format, which it said would be its primary focus in the coming years.

Target’s net income fell to $712 million, or $1.54 a share, for the quarter ended Oct. 29, from $1.49 billion, or $3.04 a share, in the year-ago period. Adjusted earnings of $1.54 per share missed analysts expectations of $2.16.

Target had higher-than-expected markdowns, especially in the final weeks of the quarter, CFO Michael Fiddelke said on a call with reporters. It also spent more to manage inventory that arrived early as the supply chain backlog started to ease.

Total revenue increased 3.4% to $26.52 billion, beating estimates of $26.41 billion. Same-store sales rose 2.7%. more than expected.  Same-store sales growth was driven by a 1.4% increase in traffic and an average ticket that was higher by 1.3%.

The retailer saw unit share gains across all five of its core merchandising categories during the quarter. Category performance was led by growth in food and beverages, where comp sales grew in the low double-digits, and essentials, which grew in the low single digits, fueled by sales of pet and health items.

Beauty had comparable sales growth in the mid-teens.Sales slowed in discretionary categories, including home, sporting goods and toys.

Although it impacted profits, Target gained ground in reducing its excess inventory during the quarter. Its inventory was up about 14% year over year versus 36% in the second quarter and 43% in the first quarter.

In a statement, CEO Brian Cornell noted that sales and profit trends softened “meaningfully” in the latter weeks of the quarter, with customers’ shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty.

On a call with reporters, Target chief growth officer Christina Hennington said customers’ price sensitivity intensified during the last two weeks of October. 

“It was a precipitous decline and, frankly, we’ve seen those trends in the early part of November as well,” she said.

On the same call, Cornell noted that consumers have been “stressed” and are looking for promotions and “that great deal.”

“And I would expect that promotional focus will continue throughout the holidays,” he said.

Similar to the Home Depot and Wal-Mart, Target’s cost of sales increased more than total sales during the quarter, rising 8.1% to $19.68 billion, as gross margin contracted to 25.8% from 29.0%.

Citing softening sales and profit trends that emerged late in the third quarter and persisted into November, Target said it will plan for a “wide range of sales outcomes in the fourth quarter.” It now expects same-store sales to be down in the low single-digit percentage range and an operating margin rate around 3%. Analysts were expecting sales to increase 3.1%.