1Q23 earnings for Target (TGT)

TGT and Walmart (WMT) are the two big general retailers serving middle America. Costco (COST) is the third behemoth, but it has a somewhat different concept and a younger, much wealthier customer.

As I see it, TGT is more aggressive/innovative than WMT, has a larger national presence in the US (WMT has been mostly shut out of the northeast and CA) and is somewhat more upscale. (I own TGT but not the others, which also says something about my risk preferences.)

Anyway, TGT reported 1Q23 (ended 4/29) earnings today. My main takeaways:

–sales were flattish, yoy, with eps down slightly

–daily use items (food, household goods, beauty) were strong sellers, discretionary ones (clothing, furniture, electronics) not so much. Put a different way, staples are chugging along, with more business cycle-sensitive items suffering. Not really surprising

–inventories were down by 16%. This is a combination of a rise in daily use items on hand with a 25% fall in stocks of discretionary goods. I find the wording of the press release is ambiguous, leaving it unclear whether these are quarter on quarter comparisons or year on year. The way I read it, what we’re seeing is the last stage of reduction in the massive oversupply of stay-at-home goods TGT had amassed early last year

–the company clearly wanted to highlight the continuing problem of shrinkage–theft of merchandise, including by organized criminal gangs–which TGT expects to be $500 million higher this year than last

As a shareholder, I think the stock will continue to tread water for a while. I’m not inclined to either buy or sell.

As an analyst, TGT and WMT give a good read on how the economy as a whole is doing. Putting this in (my preferred) simple-minded terms, when the economy is bad, consumers trade down to WMT; when they’re feeling flush, they trade up to TGT. WMT has recently made the point that its food sales are booming, which it attributes to more affluent consumers trading down to WMT’s discount groceries.

My simple conclusion: on a net basis, no one is trading up …and lots of people are still trading down, away from drug stores to TGT and from supermarkets to WMT. Shrinkage is also a sign of economic stress. So: no reason to be mega-pessimistic about the domestic economy, but NO reason to amp up any bullish feeling.

2 responses

  1. Shrinkage would be a sign of stress if it were people shoplifting for their own consumption. My impression is that the major problem is shoplifting for resale by organized groups..

  2. Hi. I hope you’re doing well. Thanks for the comment.

    I was using the TGT press release when I wrote my post. Early on in it, the CEO is quoted as saying “As we look ahead, we now expect shrink will reduce this year’s profitability by more than $500 million compared with last year. While there are many potential sources of inventory shrink, theft and organized retail crime are increasingly important drivers of the issue.”

    The convention in communications like this is that the most important factor is listed first. So I take it that theft ex organized retail crime is the larger category. (Traditionally, store employees, not customers, are the center of the theft issue–a reason companies don’t typically talk about shrinkage that much.) One could reasonably argue, though, that the emergence of organized gangs of thieves is scary enough that any merchant will not want to make this its #1 issue, and that the convention has been deliberately flouted.

    You’re right, I think, that retail gangs are the bigger problem. It’s something new, the amounts of money are large, there’s the threat of violence, and it appears to be happening more and more.

    The projection of a $500 million increase in losses to shrinkage is itself an astounding one. It’s 15% of last year’s operating income! My guess would be that retail gangs are the major driver of shrinkage as a percentage of sales.

    So you’re right that, at best, I used poor phrasing in my closing paragraph.

    That doesn’t mean consumers aren’t worried. I read the earnings call transcript after posting. In it, TGT says customer purchases of discretionary items were the strongest in February and deteriorated month by month as the quarter progressed. Daily use items showed strength throughout. TGT’s view is that customers’ increasing caution is due to worries about inflation, the banking crisis and possible recession.

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