Having disappointed the market the other day with its results, Target has now disappointed the market with a profit warning.
CNBC:
Target warned investors Tuesday that its profits will take a short-term hit, as it marks down unwanted items, cancels orders and takes aggressive steps to get rid of extra inventory.
The retailer slashed its profit margin expectations for the fiscal second quarter to account for a wave of goods winding up deeply discounted or on the clearance rack.
Shares closed on Tuesday at $155.98, down 2.31%.
Another sign that consumers are under pressure?
On balance not, I reckon. It may be that the company has simply been caught out by a relatively routine change in consumer-spending patterns, a regular hazard in the retail sector. Taking a hit on inventories is common enough for just that reason, although it’s clear (as is mentioned below, and I discussed here) that inflation is also having some effect on consumer behavior. Moreover, inventories may have been built up in an effort to protect against supply-chain disruptions of the type that we have been seeing recently.
CNBC:
Retailers from Walmart to Gap face a glut of inventory as inflation-pinched shoppers skip over categories that were popular during the first two years of the pandemic. Gap, for instance, said customers want party dresses and office clothes instead of the many fleece hoodies and active clothes the company has. Walmart said some families are making fewer discretionary purchases as the prices of gas and groceries rise. Abercrombie & Fitch and American Eagle Outfitters both reported a steep jump in inventory levels, up 45% and 46%, respectively, from a year ago from a mix of items not selling and supply chain delays easing.
The extreme shift in consumers’ spending habits comes as retailers start to get back to healthy in-stock levels. That means some have an abundance of sweatpants, throw pillows and pajamas just as consumers search for swimsuits and suitcases. Plus, some shoppers are trimming back on spending due to inflation or putting more of their dollars toward experiences like dining out and traveling.
From the Wall Street Journal:
Analysts expect the excess inventory to crimp retail profits this year and potentially send the industry into a downward spiral of discounting that plagued it before the pandemic.
That will be awkward for the greedflationists to explain away.
One comment I noticed in a Bloomberg report on the inventory issue was worth noting.
“The just-in-time mentality is broken now,” said Jen Bartashus, a retail analyst at Bloomberg Intelligence. “So you’re seeing retailers carry more inventory than they traditionally carried.”
That’s probably going to last a while. Major economic trauma can have a ‘scarring’ effect on corporate (and not just corporate) behavior (I wrote about this here and here). There’s a good argument to be made, for example, that the financial crisis led to a long-term reevaluation of risk, a phenomenon that goes some way to explaining the relatively depressed rates of investment activity that followed the financial crisis, and we may see an echo of that as companies begin (at some level) to price in pandemic risk, a risk not many of them had previously considered with any seriousness. The same will almost certainly hold true of supply-chain risk. Over time that will lead to reshoring/nearshoring, but it’s easy to see how the view of what is a prudent level of inventories is going to change over a wide range of industries, at least for now. However, as Target has just reminded us, higher inventories are not without their risks either.
However, any gloomsters who feel that this comment has been altogether too upbeat might like to note this.
The head of Trafigura [Jeremy Weir] has warned that the oil market could reach a “parabolic state” this year with prices surging to record highs and triggering a slowdown in economic growth . . .
Weir added it was highly probable that oil prices could rise to $150 a barrel or higher in the coming months, with supply chains strained as Russia tries to redirect its oil exports away from Europe . . .
Weir said the rising price of other commodities, including metals such as copper and lithium, was also likely to weigh on global economic growth and could ultimately trigger a slowdown to curb demand.
“If we see very high energy prices for a period of time we will eventually see demand destruction,” he said. “It will be problematic to sustain these levels and continue global growth.”
Or this, in the New York Times:
For large and small nations around the globe, the prospect of averting a recession is fading.
That grim prognosis came in a report Tuesday from the World Bank, which warned that the grinding war in Ukraine, supply chain chokeholds, Covid-related lockdowns in China, and dizzying rises in energy and food prices are exacting a growing toll on economies all along the income ladder. This suite of problems is “hammering growth,” David Malpass, the bank’s president, said in a statement. “For many countries, recession will be hard to avoid.”
World growth is expected to slow to 2.9 percent this year from 5.7 percent in 2021. The outlook, delivered in the bank’s Global Economic Prospects report, is not only darker than one produced six months ago, before Russia’s invasion of Ukraine, but also below the 3.6 percent forecast in April by the International Monetary Fund. . .
Or this, from Freightwaves:
Credit card spending has been accelerating at a time when personal savings rates have continued to decrease and move toward some of their lowest rates (last reading 4.4) since the Great Financial Crisis (4.5 in August 2009). There are two ways to read very low savings rates: either consumers are exceptionally confident and exuberantly spending their money or consumers are spending every last dollar they have in an attempt to keep their heads above water in a high-inflation environment. Either way, there isn’t any slack left in consumer wallets — it’s hard to imagine consumer spending growing from here.
An ‘ordinary’ recession ahead or stagflation? Take your pick. My guess? The latter.