Consumers continue to face economic challenges, even as inflation takes a dip, and the punchline continues to show up in retail receipts. In reporting its third-quarter earnings on Wednesday (Nov. 15), Target said consumers are experiencing financial strain, prompting the retailer to adopt a cautious near-term outlook.
“There’s tremendous pressure on the consumers wallet and the impact of very sticky food and beverage inflation, which compared to pre pandemic. Food and Beverage prices are up on average 25%,” COO John Mulligan said. “And that certainly pressured consumers as they’re making choices and certainly has forced them to make very tough choices when it comes to discretionary goods.”
A recent PYMNTS report affirmed that while the holiday season is conventionally linked with joy and celebration, it frequently introduces considerable financial stress for numerous consumers, especially those reliant on each paycheck.
And as highlighted in a recent PYMNTS Intelligence report, “New Reality Check: The Paycheck-to-Paycheck Report,” which investigates the influence of seasonal spending on consumer finance, 55% of individuals experiencing fluctuations in their finances attribute financial distress to events and celebrations. Notably, November and December emerge as the periods with the highest levels of financial anxiety.
Subsequently, close to half of consumers contemplate reducing nonessential expenditures as a tactic to ease seasonal financial strain, with approximately 1 in 5 consumers identifying it as their primary approach.
Moreover, credit products, utilized by 36% of consumers grappling with seasonal financial stress, are acknowledged as a coping mechanism during the holidays, with nearly 21% of respondents deeming this their foremost strategy.
In the third quarter, Target saw a 4.9% decrease in comparable sales, aligning with expectations and industry trends.
“Discretionary categories were the driver of this decline,” Mulligan said, adding that was partially counteracted by growth in frequency categories. Digital fulfillment capabilities, specifically streaming services, demonstrated high single-digit comp growth, while brown box delivery encountered difficulties due to reduced discretionary spending.
Notwithstanding the challenges on the top line, Target’s third-quarter EPS of $2.10 surpassed expectations, showcasing strong profit performance. The company attributes this success to reduced freight costs, disciplined inventory management, category and channel mix adjustments, and continuous efficiency enhancements.
During the conference call, Target announced it exceeded $100 billion in annual revenue. In conjunction with this, the retailer detailed how it navigated challenges, including evolving consumer spending patterns, persistent inflation, and various top-line and bottom-line pressures, ultimately demonstrating improved profitability compared to the previous year.
However, despite rapid progress in the current year, Target is focusing on long-term growth opportunities. The company is investing in stores, supply chain, team and digital capabilities to address evolving consumer needs and preferences.
While profitability has seen significant growth, Target acknowledged the importance of sustainable growth in both traffic and sales. With that, the company is committed to addressing challenges in the retail industry, such as consumer spending delays and the impact of inflation on discretionary income.
With that in mind, Target has outlined its strategy for the upcoming holiday season, intending to emphasize its value proposition, promotions, and competitive pricing aiming to motivate shoppers to spend.
“Our goal this holiday season is to create the perfect combination of incredible value inspiring and fresh products and a joyful shopping experience as you stroll the aisles in our stores or on the recently refreshed target website and app,” said Chief Growth Officer Christina Hennington.
According to Hennington, that means showcasing on-trend products, inspiring color palettes, imagery and in-store marketing to evoke the holiday spirit.
Recognizing that families want to celebrate affordably during the holidays, Hennington said, Target will focus on retail fundamentals like maintaining stock levels on seasonal must-haves and ensuring shopping is easy and convenient.