The market “shock and awe” that took place this week, was a long time coming, and in a way is the ripple effect of our transition from “pandemic to endemic” as far as the normalization of Covid in our lives. Certainly, this has been exacerbated by staggering inflation, supply chain pain, and a war.
Retailers are still dealing with the radical disruption that Covid brought or wrought upon them. First keeping us fed and safe, and then attempting to fill our lives with holiday joy at the end of the last year, at whatever cost. The bill has come due.
It is safe to say retailers are attempting to transition to the next phase, or the “great retail reset” while at the same time dealing with inventory that had been sitting on floating warehouses or docks, that they expected a quarter ago. It is also becoming clear that the supply chain problems thought to be transitory and associated with the pandemic, maybe not. This too is endemic to a “just in time” inventory mentality that retailers once thought to be a panacea. Perhaps all the AI in the world cannot accommodate the complexities of a global supply chain so vulnerable to so much.
A Week of Reckoning
Meanwhile the trifecta of an overheated economy, the war in Ukraine, elevated labor, and transportation costs, along with a misreading of the consumer zeitgeist led to a week of reckoning for some of the greatest retailers on the planet. Scott Mushkin, retail analyst and founder of R5 Capital said, “I’ve done this for 30 years and I’ve never experienced anything like we experienced today in retail.”
Target executives scrambled to explain how things changed so radically in little more than 10 weeks since they were in New York selling investors on the idea that the company could maintain the momentum it built over the last two years. “We did not anticipate the rapid shifts we’ve seen over the last 60 days,” Target CEO Brian Cornell said on a call with analysts.
Despite the bleak news on its bottom line, Target continued to attract more customers in stores and online. Comparable sales increased by 3.3% as traffic to stores and online was up almost 4% compared to last year. The company’s sales grew 4% to $25.2 billion in its fiscal first quarter that ended April 30. But its cost of sales grew more than 10% and general expenses also grew sharply, with executives citing record fuel costs as one example.
Consumers still spending
“We’re still seeing healthy overall spending by our guests, even as their spending continues to evolve,” Cornell said. “Notably, we continue to see meaningful spending surges around holidays, including Easter and Mother’s Day a couple of weeks ago.”
According to data analytics firm Placer.ai, “Target has seen a more than 6% average monthly increase in visits to its stores in 2022 compared with the same time last year.” Visits have been even more impressive, up 10.5% on average for the first four months of the year, compared with pre-pandemic 2019 numbers.
Christina Hennington, Target’s chief growth officer said “Many guests are sharing their uncertainty of the overall state of the economy, but are feeling more positive about their personal finances.” Well, I am afraid even that is subject to change.
The View of An Economist
I reached out to Dr. David Kass, Clinical Professor of Finance at The University of Maryland for his take on the disruption felt by virtually all of the major retailers that reported this week, and he had some interesting insights regarding consumers’ confidence. Naturally, he sighted inflation being a huge driver, reducing demand.
He also noted that after consumers were in lockdown for the better part of two years, things have changed markedly. Up until recently the sales of all things supporting our “sanctuaries” including computers, TVs, and home improvement items were top of mind and wallets. Now that it feels safe to rejoin society, service sector spending has taking over. “Consumers are suddenly planning trips, going out to restaurants, and being generally more social” he noted. This matches the reported drop in electronics and home furnishings spending which both Target and Walmart
Dr. Kass also pointed to the fact that with approximately 55% of Americans having investments in the stock market, they are likely to begin to feel less “well off.” Thus, further belt tightening is likely, which is what the Fed is aiming to do anyway. He also noted the tightrope that the Federal Reserve Chairman Powell is walking regarding a “soft landing” as they tighten monetary policy in tandem with consumers already beginning to change their spending patterns.
Naturally, I could hardly engage with a noted economist without asking about the likelihood of a recession. Like a doctor making a prognosis, Dr. Kass noted that we have learned to expect a recession about every 10-years, and it is particularly true when we experience the parallel effects of both monetary and fiscal policy tightening, combined with high inflation.
On a positive note, he stated that the economy is still strong with only 3.6% unemployment rate, closing on the lowest unemployment in 15 years. He believes that there is less than a 50% chance of a full-blown recession. He further postulated that inflation should be down to between 4- 5% by year’s end. I hope he is right.
Still on Target?
What we should not forget, even with all this turmoil Target remains one of the best mass-market retailers on the planet. They are also playing the “long game” which has served them well over the decades. “It was a choice that Target made to not pass on rising costs due to higher wages and increased logistics costs to their guests” noted Jordyn Holman, of Bloomberg News
Neil Saunders, managing director of the data analytics firm GlobalData, said he was impressed Target was still able to grow sales. “I think what we are seeing is a normalization,” Saunders said. “I think that the trend from here on in is going to be for lower growth and it’s probably going to be for reduced profitability. But I think that the deterioration is particularly sharp this quarter because it’s the first quarter where we’ve seen the correction.”
RBC Capital Markets analyst Steven Shemesh reported on Thursday “While lingering cost headwinds and increased uncertainty around the financial health of the US consumer warrant numbers coming down, we remain of the view that Target is structurally a faster growing, higher margin business post-strategic reset.” Shemesh concluded “We believe Target’s steady reinvestment behind digital capabilities, right-sizing price gaps, store remodels, and owned brands will result in a structural step-up in the company’s revenue base,”