Executive Summary: Target’s recently reported 2Q22 results (ending July 30, 2022) included: traffic +2.7% (up +20% since 2019); store comps +1.3%; digital comps +9%; same-day services (led by Drive UP) +11%; and, most notably, a 1.2% operating margin (down from 9.8% during 2Q21) driven by heavy discounting to deal with excess inventory (particularly in discretionary categories) and higher freight & transportation costs.
All the same, TGT shares are up +16% over the last month, presumably because investors believe that all the bad news is out with blue skies ahead. However, a 2Q inventory impairment & profit squeeze reveals consumer problems, especially when considering that the chain added 90MM guest visits over the last 3 years. While management noted that consumers in the current inflationary environment are focused on value, we would point out that consumers are also dispensing with spending on non-essential items. As we discussed in our last post, a +22% y/y increase in rent CPI during July is certainly squeezing consumer spending on everything else consistent with Target’s top-line 2Q results driven primarily by Food & Beverage and Household Essentials.
It is important to consider Target’s warning that “the macro and consumer risks in the back half of this year feel skewed to the downside” pressured by “a very challenging environment in a year of multiple challenges, including rapidly changing consumer preferences, inflation at 40-year highs, volatile supply chain conditions and rising fuel and transportation rates that are expected to add well over $1 billion of cost this year”.
In conclusion, we propose that changing consumer preferences may not be voluntary…