Predictions That Student Loans Would Impact Target’s Earnings May Have Hit the Bull’s-Eye

The retailer’s strategy of appealing to millennials may be backfiring as the generation prepares to lose spending power to student loan repayments.

Once again, consumer sentiments’ seeming ability to motivate spending behavior was evidenced Wednesday (Aug. 16) as Target’s Q2 2023 earnings release met analysts’ downgraded expectations. The company saw its second quarter comparable sales decline 5.4%, mainly in discretionary categories, with the loss partially made up for in essentials and beauty along with food and beverage purchases.

This loss and its drivers were predicted back in June by JPMorgan analyst Chris Horvers in a client note obtained by MarketWatch.

“We continue to believe that the consumer is broadly weakening while the share of wallet shift away from goods,” Horvers said. “Target has been giving back [market] share on a one-year view, and we believe this share loss could accelerate into back to school and linger into holiday given consumer pressures and recent company controversies.

“Target over-indexes to the millennial customer and, should student loan payments come back on, the company is more exposed than others in our coverage,” the analyst added.

Horvers seems to have the right idea about consumer sentiment, at least where it intersects with concerns about student repayments and purchasing power. This is illustrated in the chart below from PYMNTS’ July “Consumer Inflation Sentiment” report.

Perhaps in line with the age cohorts’ earnings differences, millennial and Generation Z consumers express greater concern over the resumption of student loan repayments. This could be because Generation X, baby boomers and seniors average higher wages than the younger generations, which could thus make the repayment restart less burdensome.

With grocery share spend ceded to Walmart and nearly everything else dominated by Amazon,  Target had so far found its niche in more discretionary purchases.

However, PYMNTS’ further research found millennials, a main Target shopping demographic, are set to lose 6.5% of their spending power in fall when repayments resume. Part of that budgetary pullback will no doubt hit further discretionary purchases, with preparation for this belt-tightening perhaps already reflected in the big box retailer’s most recent earnings release.

Analysts’ accurate predictions on Target’s quarterly earnings — along with a cautious consumer sentiment ahead of student loan repayments — could be a hint of the general retail landscape yet to come. For Target and other merchants focused on discretionary purchases, winter may be coming early.