We’ve also got a look at the “resilient consumer” and new rules for the buy now, pay later industry.
In this podcast, Motley Fool analyst Jason Moser and host Mary Long take a look at Target earnings, the “resilient consumer,” and new rules for the buy now, pay later industry.
Then, Motley Fool contributor Matt Frankel joins for some David-versus-Goliath stock matchups.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
Mary Long: Target misses the mark, but you’re listening to Motley Fool Money. I’m Mary Long, joined today by Jason Moser. Jason, thanks for being here.
Jason Moser: Hey Mary, thanks for having me.
Mary Long: Of course. Today, Target reported earnings. Here’s what I’ve got. Comparable sales down 3.7%. That’s the fourth straight quarter of declines there. Total sales, down 3.2%, traffic, down 1.9%, average transaction, also down 1.9%. Sounds like a lot of bad news. What’s behind this?
Jason Moser: It does sound like bad news. It’s par for the course, I guess, for most retailers and feels like, with the exception of maybe a few. But I think with Target, they’re coming off of some challenges here recently, and when you look through the release, when you look through the call, the management was very quick to focus on the consumer and the normalization. That’s a word they used in the call that I think accounted for a lot of what’s been going on. It’s this normalization and spending patterns that they saw really emerging a couple of years ago as we got back to normal, where consumers are focusing a little bit more on services and entertainment stuff outside of the home, which makes a lot of sense. We were all sequestered for a while, and then, what they say, curtailing those activities during the pandemic. I think what we saw or what we’re seeing, at least with Target’s results, obviously inflation and higher consumer prices are still playing a role in their results, and they’re seeing some soft trends in the discretionary categories. They noted in the call. It was most prevalent in the home and hard lines part of their business, and that makes a lot of sense, but it’s something they’re going to have to overcome. It also makes me think of restaurants when they’re dealing with difficult comps. They go through a stretch where they are really performing well; they keep on chalking up all these great numbers, then they go through a little bit of a low where things hit a little bit of a reset, and then they get back to growth beyond that. That could be where we are with Target right now, but there’s no question. They’re dealing with what has been a challenging consumer environment.
Mary Long: I think you’re right when you say this is par for the course management seems to have the same outlook. They didn’t seem too worried. Guidance for the full year, unchanged. Wall Street seems to feel differently. Last I checked, the stock was down 7% this morning.
Jason Moser: Yeah.
Mary Long: But management doesn’t seem to be too troubled by that.
Jason Moser: No, and they shouldn’t be. I think, again, it’s taking the longer view. It could be a little bit of taking some short-term pain for long-term gain there. There are some things to smile about in the call. They’ve seen improvement in many of the drivers of the business over the last several quarters. They go. We hear this a lot here. This resilient consumer, they talk about the US consumer remains resilient in the face of multiple challenges. It’s a little bit confounding at times. We know that consumers are really feeling the pinch of higher prices, and it’s becoming a little bit more difficult to access capital in that way, but it does feel like with Target, inventory is down 7% from a year ago, gross margin expanding a little bit. Thanks to cost controls, they’re resorting to less discounting. That’s always a good thing to see. I don’t know if you remember, Mary, several quarters back, the word shrink; that was the word dujour for many of these companies, and they’re seeing a lot of improvements in their efforts to control that shrink as well. One of the greatest quarter in the world, but it does feel like they are on the path to recovery here.
Mary Long: I want to zoom in on the consumer for a second because Brian Cornell ain’t talking about all this. Put some of the blame on the macro. Basically, sales are down, budgets are tight. We expect that. In response, Target’s already slashed prices on already 1,500 everyday items. I think they’ve said that they’re going to slash prices on up to 5,000 items.
Jason Moser: Yeah.
Mary Long: What are these items there? Milk, bread, back-to-school stuff, summer party supplies. What do those discounts actually look like, though? Because of the press release were Target announced this, plain bagels are 30 cents off, frozen pizza, 20 cents off, laundry detergent, 70 cents off. Are those lowered prices enough to get consumers back at Target and spending more again?
Jason Moser: As prices and inflation persist, it certainly can’t hurt. I think all consumers appreciate lower prices, and Target is trying to do what they can to participate in that. It does feel like they’re making a lot of progress in regard to their loyalty program. They’ve relit the fire on that Target Circle loyalty program. They relaunched it back in April. They have over 100 million members now. They added more than one million new members to that Target Circle program in the quarter. I’m glad you focused on key items there. They’re grocery items. I think, where Target is concerned, that’s a place where they could stand to improve. With Target, grocery still only represents, basically, a fifth to a quarter of the overall business. Whereas when you look to competitors in the space, like Walmart, for example, Walmart, it’s a leader in the grocery space, and you’re talking about 50% in that neighborhood. It does make a lot of sense for them to really focus on cutting prices, where consumers see it most day in and day out. It remains to be seen whether it ultimately will have a great impact on bringing consumers into the stores on a more regular basis. But again, going back to that Target Circle relaunch, there’s a lot to be said for that. I think that’s an important thing they did there because, we’ve seen obviously throughout the last several years and decades. I guess, really, if we could say, there’s just a lot of power in that loyalty program and that membership model. If Target can continue to focus on creating reasons for customers to come back, and loyalty programs, membership programs are usually one of the best ways to do that, then they should benefit from that.
