I’m just getting around to reading a transcript of the TGT 1Q22 earnings conference call–the one after which the company’s stock lost a quarter of its value. I should also mention that I’m a long-time holder of TGT shares. I haven’t bought or sold on the earnings report, even though I think the market response to it is a bit excessive.
The first thing that strikes me is that there are three presenters, each trying to put a different marketing spin on the quarter, intending to make the results look better than they were. This is, in my experience, at least mildly insulting to listeners/readers, and never a good idea. Another result of this approach is that it’s not 100% clear what happened in the quarter.
My take on what TGT said:
–the higher oil price, caused by the Russian invasion of Ukraine, is a significant issue, in two ways
–freight costs are higher, and
–consumers are factoring in the cost of gasoline into their purchase decisions. What I mean is–is it cheaper to walk to the drug store or the supermarket, which may charge more than TGT, or to take the sure loss of spending $5 on gasoline to drive to the TGT store in the mall? This deliberation may not be 100% rational, but it seems to be causing fewer customer visits. TGT’s best defense has been to keep prices across the board clearly lower than they would normally be (squeezing gross margins).
–purchases of stay-at-home goods have fallen off a cliff, taking TGT by surprise. The result has been that TGT has a glut of TVs, kitchen appliances and furniture in inventory. The company has already started to discount merchandise to get it off the selling floor, putting some in temporary storage. But it will take time and skill to rectify this mistake, with lower overall margins for TGT until this is done.
implications
–other retailers have been reporting similar experiences, although generally not on such an aggressive scale as TGT
–it will take TGT a couple of quarters to recover
–although inflation in advanced economies is ultimately about wage inflation, there has been intense stock market focus on increases in the price of physical goods. The TGT quarter seems to imply that we’re past the peak for this, suggesting less urgency for the Fed to raise interest rates. I still think the 10-year yield will ultimately settle at 3.5% – 4.0%, though.