Target Warning Overshadows Retail Sales Gain; Stock Slumps

U.S. consumers may already be starting to shop as if a recession is right around the corner. While nationwide October retail sales exceeded expectations, Target Corp. (TGT) shares plummeted 15% in on Nov. 16 after the retailer cut its profit outlook for a second time this year, citing a "challenging economic environment" as it reported disappointing quarterly results.

"In the latter weeks of the quarter, sales and profit trends softened meaningfully, with guests' shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty," said Target CEO Brian Cornell. "This resulted in a third quarter profit performance well below our expectations."

Customers are "holding out for and expecting promotions more than ever, spending less on regularly priced items," Target Chief Growth Officer Christina Hennington said on the company's earnings call. "These trends only became more pronounced towards the end of the third quarter, when spending patterns changed dramatically. With inflationary food prices absorbing more of their spending, those costs are crowding out other categories, including spending on discretionary items, and in some cases, even household essentials."

Inflation contributed to a 1.3% increase in U.S. October retail sales that beat market expectations, with spending at gas stations (up 4%), on motor vehicles and parts (1.5% higher from September), and food and drink away from home (+1.6%) registering the biggest gains. In contrast, spending at department stores fell 2.1%. Retail sales statistics aren't adjusted for inflation, so the 7.7% increase in the Consumer Price Index in the year through October accounted for the bulk of the 8.3% year-over year increase in October's retail sales.

Not all retailers are struggling. While Target shares slumped, those of Lowe's Companies Inc. (LOW) gained 5.5% after the home improvement chain topped quarterly earnings estimates and raised its annual outlook. On a conference call, Lowe's CEO Marvin Ellison credited strong consumer disposable income and near record personal savings, along with elevated housing prices and the growing need for nondiscretionary repairs as U.S. housing stock ages.

Most retailers' shares lost ground, however. Best Buy Co. Inc. (BBY) fell nearly 7% after October retail sales at electronics and appliance stores slipped 0.3% on an adjusted basis. Advance Auto Parts Inc. (AAP) slumped nearly 17% after falling short of quarterly earnings estimates, with CEO Tom Greco noting on the conference call that "the macroeconomic and competitive environment changed and it really impacted us in the third quarter."

Even Walmart Inc. (WMT), which topped earnings expectations and raised guidance a day earlier, boosting its share price 6.5% on Nov. 15, cited its growing popularity with higher-income food shoppers as one of the factors. "While we're encouraged by our position and our confidence in our business remains high, the macro backdrop remains challenging as persistent inflation is impacting the consumer and our business," Walmart CFO John David Rainey said on the company's earnings call.

Target executives were more emphatic, with the CEO citing "a very significant change in shopping behavior" in the second half of October. "We've had a consumer who has been dealing with very stubborn inflation for quarter after quarter now," Cornell said. "They're certainly starting to look at higher prices in food and beverage. In many cases, prices are up double digits. They're shopping very carefully on a budget."