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.

Rick Watson

Rick Watson founded RMW Commerce Consulting after spending 20+ years as a technology entrepreneur and operator exclusively in the eCommerce industry with companies like ChannelAdvisor, BarnesandNoble.com, Merchantry, and Pitney Bowes.

Watson’s work today is centered on supporting investors and management teams incubating and growing direct-to-consumer businesses. Most recently, in partnership with WHP Global, Rick was a critical resource in architecting the WHP+ platform, a new turnkey direct to consumer digital e-commerce platform that powers AnneKlein.com and JosephAbboud.com.

Watson also hosts a weekly podcast, Watson Weekly, where he shares an unbiased, unfiltered expert take on the retail sector’s biggest players.

In the past year alone, Rick has spoken at many in-person and virtual events as well as podcasts on topics ranging from retail/ecom to supply chain/logistics and even digital grocery including CommerceNext IRL, ASCM Connect, and Retail Innovation Conference.

https://www.rmwcommerce.com/
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