Target Q3 2023 Earnings: Is This The Plan For Merchants in Discretionary Categories?
The story of Target the last 3 years is navigating the pandemic bullwhip. John Mulligan, the retiring COO of Target, told the story well:
* 2021: Could not secure enough inventory to meet demand due to digital growth.
* 2022: Growth in discretionary reversed. Way too much inventory. Operating margins at historical lows.
* 2023: Right-sizing inventory, control what we can control.
Target Q3 2023 Earnings quick recap:
* Comparable sales down 4.9%, revenue 4.2% lower
* Gross margin 27.4%, up 11% y/y.
* Operating margins at 5.2%, a full 1.3 points higher than last year.
A few odds and ends:
* Same-day sales up, led by Driveup up 12% y/y.
* Comp sales were expected to be flat y/y in 2023, but are down 5%. More than expected even given Target's huge efforts.
* Beauty an outlier: high single digit growth y/y. Rihanna by Fenty launching soon.
* Discretionary y/y down high single to low double digits. Electronics and apparel the worst. Home high single digit decline.
* Other revenue basically flat, proving Target is still a retail media outlier.
Macro-trends Target is reporting:
* Units and sales down for discretionary items 7 quarters in a row.
* Food & Beverage inflation still up 25% since pre-pandemic
* Consumers still making difficult choices, responding to heavy promotions.
In response to this, Target has identified four key factors that all multi-category retailers should be thinking about in the face of these trends:
1 - Right-size your inventory, particularly in declining discretionary segments. Everything else fails if you get this wrong. Target's inventory is down 14% y/y, and discretionary inventory is down even lower at 19% y/y.
2 - Below $25 is a critical price point across the assortment. This must be highlighted to consumers, especially during shopping seasons.
3 - Invest in newness, on-trend and freshness.
4 - On weeks without shopping, promotions the only thing driving demand. Don't chase unsustainable gains.
Finally, for Q4 2023, Target is forecasting mid-single digit comp declines, which feels about right in a balanced discretionary retailer and is probably about the best you can do with huge efforts in these categories.
These lessons from Target I think all retailers need to hear. We are not all in essentials or replenishable categories. Cautious category-by-category inventory planning is the essential watchword.