HALLANDALE BEACH, FLORIDA - MAY 18: People wearing protective masks walk from a Walmart store on May 18, 2021 in Hallandale Beach, Florida. Walmart announced that customers who are fully vaccinated against Covid-19 will not need to wear a mask in its stores, unless one is required by state or local laws. The announcement came after the Centers for Disease Control and Prevention said that fully vaccinated people do not need to wear a mask or stay 6 feet apart from others in most cases, whether indoors or outdoors. (Photo by Joe Raedle/Getty Images)

Target profit drops 90% as inflation-weary shoppers pull back

But Target reported that its price cuts did little good: It ended the quarter with 1.5% more inventory than three months earlier and 36% more than a year ago.

The company said it has reduced the amount of discretionary items in warehouses, but Target noted that sales of those items are “putting significant pressure on our near-term profitability.”

Shares of Target (TGT) fell 2% in premarket trading on the report.

Revenues plummet, again

Target’s quarterly net income declined to $183 million, significantly lower than $1.8 billion in the same period a year ago.

In addition, adjusted earnings of 39 cents per share were well below the 72 cents forecast by analysts polled by Refinitiv. Revenue of $26 billion was slightly higher than a year ago and roughly in line with forecasts.

After seven quarters of strong earnings growth, this marks the second consecutive quarter of declining earnings at Target, although this drop was much more than the previous quarter’s drop of 40%.
Consumer decline in demand for discretionary items is one of the factors fueling fears of a recession, as consumer spending accounts for nearly three quarters of the country’s economic activity.
Target’s disappointing results contrasted with much stronger results at larger rival walmart (WMT), which reported on Tuesday that profits were only slightly lower than a year earlier. Walmart also said it expects an 8% to 10% drop in annual profits, although that is a smaller drop than previously forecast.

‘Feel the impact of inflation’

The environment for Target and similar retailers remains “challenging,” CEO Brian Cornell told investors on Wednesday. But Target sees “an encouraging start to the back-to-school” shopping season, he said.

He believes the blow to earnings in the past quarter should not be repeated: “The high-level story is, the vast majority of the financial impact of these stock moves is now behind us.”

Still, it is a difficult time to be a retailer, given the unpredictability of consumer spending and the effect of macro factors such as inflation.

The goal is “to hear from our guests that they still have purchasing power, but are increasingly feeling the impact of inflation,” said Christina Hennington, the company’s chief growth officer. However, she said the drop in gas prices over the past two months was “encouraging”.

Target’s heavier reliance on discretionary vs. Walmart

These trends hit Target harder than rival Walmart, which gets a larger portion of its sales and profits from essentials like groceries. Target usually depends more on those discretionary items.

Walmart results ease some recession fears

Walmart has a reputation for offering the lowest prices at major retailers in many categories, but in Tuesday’s earnings report, the company said sales to middle and higher income buyers have increased.

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