Best Idea Short TGT showing how bad consumer discretionary can get in a consumer downturn, and how far down earnings can go. Big headline miss of 28% on EPS with revenues slightly ahead, taking down margins yet again for the year with both gross margin pressure and some SG&A deleverage. The direction of business is very bearish. TGT explicit that discretionary trends are getting worse in real time. TGT’s continued margin pressure and slowing revenue trends has been core to our call here, discretionary retail is going to get more challenging as the consumer slows and promotional intensity picks up. According to management discretionary categories slowed late in 3Q, and that continued into November. The details on the comp trend by month include August up 2.8%, September up 4%, October up 0.9% but +HSD% comps in early Oct slowing to LSD% decline in last 3 weeks, with weakness continuing into November. All of the comp slowdown was driven by those discretionary categories. The street doesn’t seem to think negative comps are possible for TGT, but get ready for them. We think you’ll see comps negative in 2 of the next 3 quarters. Margins remain under pressure. The company continues to promote to clean up inventories and drive purchases as consumers get more price sensitive. Inventories still up 14% on sales up 3%, though interestingly management noted it’s getting much leaner on discretionary inventory. That’s not necessarily a good thing as it relates to near term sales given other retailers are heavy in product and clearing out at low prices, so TGT less likely to win Discretionary transactions over 3 to 6 months. Also dragging on margin was elevated shrink, a theme we’ve been watching in recent weeks, and a headwind to margins we think could be higher for longer, in addition to ramping return rates relative to the last couple years. Meanwhile SG&A is deleveraging as the company faces continued wage inflation. The wage and SG&A pressure is likely to stick around, even as pricing and sales slow from a weakening consumer. We think earnings continue to be under pressure and 2023 EPS estimates need to come down significantly. We’re looking at NTM EPS of $7.50 to $8 while the street is around $10.50. So another 25% or 30% in EPS risk and multiple risk as well with the stock trading around 20x our EPS. We think low to mid-teens on lowered numbers is reasonable or downside to $100.
For a replay of our September TGT Best Idea Short Black Book CLICK HERE
We can’t ignore the aggregate discretionary retail read provided by TGT here as well. Per TGT commentary the consumer has slowed significantly in recent weeks and become more price conscious. Discretionary purchases are requiring deep discounts to get consumers to spend. This is why Amazon did another Prime sale event just a month or so before Black Friday. We continue to think it is way to early to be buying most consumer discretionary stocks as the consumer will continue to slow at least into Spring 2023. We remain short retail. Some comments from the CFO on the call:
- “As you'll recall, the month began with an initial round of holiday promotions from Target and some of our competitors, and in that week, we saw a high single-digit increase in comp sales compared with last year. However, for the remainder of the month, we saw a low single-digit decline in comp sales over those last 3 weeks. Nearly all of the slowdown was driven by our discretionary categories, Apparel, Home and Hardlines, as our guests became increasingly cautious in their spending in those categories at both Target and throughout the industry more broadly. So far in the month of November, trends have been largely consistent with what we were seeing at the end of October”
- “The primary driver was a higher-than-expected markdown impact from promotions as our guests became increasingly price-sensitive and concentrated their discretionary spending on items on promotion, most notably in the latter weeks of the quarter. While we anticipated a highly promotional environment this fall, given the excess inventory we had been seeing across retail, this enhanced focus on promotions reflects an increasing level of stress on consumers as they navigate through multiple headwinds, including persistent inflation and rapidly rising interest rates.”
- “in light of the dramatic changes in shopping patterns we've seen both at Target and across the industry, we believe it's prudent to plan for a wide range of comparable sales outcomes in the fourth quarter that's centered around a low single-digit comp decline, consistent with recent trends.”
