Inflation Fears Cause Target Sales to Decline as Consumer Spending Slows

May 22, 2024 TruthUSA

Target stock fell over 7 percent intraday on Wednesday after the retailer posted quarterly results that showed sales declining for the fourth straight quarter as inflation-weary customers pulled back on spending, especially on non-essentials.

The discount retailer, often seen as a bellwether for U.S. consumer spending and the retail sector more broadly, reported on Wednesday a drop of 3.7 percent in comparable sales in the first quarter.

Included in that figure was a 4.8 percent decline in comparable store sales, also known as same-store sales. This is a measure of revenue from store locations that have been in operation for over a year, which serves as a key retail metric that reflects organic growth. Comparable digital sales rose 1.4 percent, partially offsetting the decline in same-store sales.

Customer traffic at Target (as reflected in the number of transactions) fell 1.9 percent in the first quarter, while the average amount customers spent per visit also dropped by 1.9 percent.

Consumers Feel The Squeeze

In an earnings call detailing the first-quarter results, Target chairman and CEO Brian Cornell said that inflation was putting a “strain on the consumer wallet” and that many shopper complaints centered on upward price pressures in household essentials, including food.

While the pace of food inflation slowed last year to 5.8 percent (and to 7.7 percent for food bought at stores for consumption at home), it saw an uptick at the beginning of 2024, which includes the period reflected in Target’s first-quarter report.

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Despite the lackluster first-quarter results, Target struck a cautiously optimistic note on its forward guidance, saying it expects comparable sales will remain at 0 to 2 percent for both the second quarter and the full year.

Target’s total revenue of $24.5 billion in the first quarter was 3.1 percent lower than in the comparable period last year. This reflects a total sales decline of 3.2 percent, mostly due to a drop in discretionary categories, which tend to take a hit when consumers retrench and limit their spending on essentials.

Walmart, by contrast, which gets more of its sales from essentials like groceries, saw its sales increase by 3.8 percent last quarter as shoppers hunted for lower prices.

In a bid to respond to the needs of inflation-battered consumers, Target announced in May that it would cut prices on 5,000 frequently bought items, including milk, coffee, and diapers.

While consumer spending has held up relatively well in the broader economy so far this year, a recent Philadelphia Fed report shows that Americans are having a harder time making payments on their credit card debt, with credit card delinquencies surging to a record high. This suggests that consumer strength may be on the wane.

It’s a view recently expressed by JPMorgan Chase CEO Jamie Dimon, who said in late April that he sees the odds of a recession as much higher than markets are pricing, while sounding the alarm on a possible bout of 1970s-style stagflation, with the inflationary component fueled in part by the Biden administration’s massive deficit spending.

“Don’t get lulled into a false sense of security because today looks okay, tomorrow is going to be okay,” he said, warning that Americans are being lulled into a false sense of confidence because the U.S. consumer appears to be in “pretty good shape” at the moment, stock markets are up, jobs are plentiful, and unemployment is low at 3.8 percent.

Inflationary Pressures Persist

The latest inflation data (from April) shows price pressures easing slightly from 3.5 percent to 3.4 percent in annual terms, and from 0.4 percent to 0.3 percent month-over-month.

However, the forward-looking measure of wholesale inflation, which reflects prices paid by businesses for inputs that later get passed along to consumers, saw an uptick last month. The producer price index (PPI) accelerated to 2.2 percent in April year-over-year after increasing by 1.8 percent in March, with the month-over-month jump being even more pronounced (from 0.1 percent in March to 0.5 percent in April).

A number of analysts saw the wholesale inflation data as a sign that inflationary pressures are sticking around for longer.

“Inflation is not going away,” Brian Wesbury, the chief economist at First Trust LP, said in a post on X after the recent wholesale inflation data dropped. “In this environment, there is absolutely no justification for a rate cut by the Fed.”

One of the consequences of soaring inflation has been a sharp increase in interest rates, which were raised quickly from near zero in March 2022 to over 5 percent by the Federal Reserve in a bid to cool demand and take the sting out of price pressures. While inflation has fallen from its recent 9 percent peak, it remains above the Fed’s 2 percent target—and there are signs and warnings that it could stay elevated or make a raging comeback.

Prices have risen 19.9 percent since President Joe Biden took office, according to the latest inflation data from the government’s Consumer Price Index (CPI) report. In some categories, the pace of inflation is even higher. For example, rent is up 20.8 percent, grocery prices are up 21.3 percent, and car repairs are up 30.2 percent.

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