JHVEPhoto
There’s been a lot of commentary recently, on both sides of the issue, whether or not consumers will continue to spend heading into the holiday season, as high gas, food and shelter costs have pushed them to focus primarily on spending on non-discretionary items.
Since Target’s (NYSE:TGT) customers have more disposable income than its lower-cost rivals, it’s possible they may go on one more spending spree before the recession gets much deeper than it is at this time.
The general consensus at this time, which I agree with, is consumers are still in the mood to buy, but many of them will be looking for bargains. I think the retail sector in general, and Target in particular, will be forced to offer a lot of products at a discount in order to attract a lot of foot traffic in the last quarter.
That will result in lower margins and declining earnings, even if it brings about higher sales than some investors anticipate.
With that in mind, we’ll have to wait to see whether or not investors reward Target for revenue or punish it for low earnings.
In this article we’ll look at several factors to take into account for the holiday season, as well as how I think investors will respond to revenue vs. earnings for the last calendar quarter of TGT.
Some factors to consider
Probably the most important thing to consider for consumer spending during the holiday season is how much impact non-discretionary spending will have on discretionary spending.
That’s important to me because many times discretionary items can have higher margins than non-discretionary products. How that plays out for Target will have a significant impact on earnings for the quarter, as consumers focus first on needs, rather than wants.
As mentioned above, Target may have a slight advantage here over some of its rivals because of its customer base having more disposable income.
Another factor at play that includes risk is that TGT is still working through excess inventory. It also doesn’t have the number of grocery SKUs its peers have, so it doesn’t have the same capacity to boost sales on that front.
On the inventory side, it has had to cut prices to sale off its excess inventory, which had a significant impact on second-quarter earnings, which dropped 89 percent. The level of the impact in the last calendar quarter will determine the performance of TGT in the near term. If it does underperform in the quarter, it could get hammered if 2023 opens up with the recession worsening, which looks increasingly how it’s going to play out.
As for consumer sentiment, it depends upon how gas, food, shelter, and energy costs play out over the next month or so. While gasoline has come down some, it’s still far above what it was a couple of years ago. Food, shelter, and energy, on the other hand, continue to rise.
The next boost in interest rates, CPI Report, and commentary by Fed officials will play a big part in sentiment in my opinion, at least in how investors look at Target and the overall retail sector.
For consumers, they know the financial pressures associated with higher costs, and will respond accordingly if things start to get worse quicker. I’m not as convinced as some analysts are about the expected boost in spending in the holiday season, outside of dramatic cuts in prices in order to loosen up customers’ wallets. It’s very possible sales may do okay, but it will be at a heavy cost to earnings. That, combined with what appears to be a worsening recession in 2023, means TGT is likely to come under pressure over the next several quarters.
Can Target bounce?
On the potentially positive side, TGT appears to have bottomed out, falling from a 52-week high of $268.98, to a low of $137.16 at the end of June. With it trading at $163.00 as I write, it does suggest the possibility that, even if there is another downward push, it has the potential to bounce in anticipation of higher holiday sales.
While that is a strong probability, I believe it would only be a short-lived bounce that would have trouble being sustainable. My reasoning for that is the weakening economy that is going to cause consumers to tighten spending even more in 2023; at least for the first half in my opinion. Much of that will be determined by what the Federal Reserve does in the next couple of months, which in turn will be determined by inflation levels.
Concerning consumer spending, Target’s bounce, or lack of it, will be determined by how people feel about their finances, and whether or not they want to take on debt at higher interest rates at any meaningful level.
Conclusion
There are a variety of factors at play in regard to TGT’s performance in the last quarter of 2022. I think it’s not likely to be as positive as some investors are thinking, and even if there are some surprising revenue numbers in the holiday season, it’ll be quickly tempered by significantly lower margins and earnings.
For that reason, I think TGT has the potential to bounce decently if revenue does climb, and since there has been a lot of positive commentary lately concerning TGT, it could be a good buy the rumor sale the news play.
As for further out, I think if TGT does bounce, it’s going to pull back once the market digests its earnings, and the probability of a worsening recession in 2023.
My thesis is TGT will probably get a bounce based on positive comments on a possible surge in holiday spending, but I don’t see that being able to hold over the next couple of quarters.
On the other hand, if polling shows customers are tightening up their wallets, TGT may only get a weak bounce and maybe challenge its 52-week low.
Be the first to comment