Target sounds the alarm bell on holiday shopping

By Nathaniel Meyersohn, CNN

New York (CNN) — Target is expecting a surprisingly weak holiday shopping season, a potential warning sign for the retail industry.

The company forecast Wednesday that sales during the final quarter of the year will be flat, and Target lowered its profit forecast. Target also reported a sluggish sales increase of just 0.3% during its latest quarter.

Shares of Target (TGT) plunged 22% Wednesday. It was Target’s worst trading day in more than two years.

Target is a bellwether for consumers’ spending habits and the retail sector as a whole. The holiday shopping season is pivotal for retailers. While Target can survive a weak holiday stretch, many smaller companies depend on strong sales during the holidays to carry them through the following months.

Target is struggling because its core middle-class customer base has been strained by higher prices and pulled back on discretionary goods like home decor, electronics and nonessential clothing in favor of groceries and everyday essentials.

“Consumers tell us their budgets remain stretched and they’re shopping carefully as they work to overcome the cumulative impact of multiple years of price inflation,” CEO Brian Cornell said on a call with analysts.

But Target has also slumped because of its merchandise mix and higher prices compared to rivals like Walmart. The chain stocks more non-essential merchandise compared to competitors such as Walmart (WMT) and Costco (COST). More than half of Target’s merchandise is discretionary, making it more susceptible than its rivals to swings in consumer sentiment.

“Target may be losing share among its middle- to upper-income consumers to retailers like Amazon, Costco and Walmart,” Joseph Feldman, an analyst at Telsey Advisory Group, said in a note to clients Wednesday.

Target in recent years has added more food and essentials to its stores, but still trails Walmart, which gets around half of sales from groceries.

Target has cut prices on thousands of items in recent months to draw shoppers, but that had limited impact on sales.

While Target is struggling, other chains like Walmart are surging.

Walmart’s US sales at stores open for at least a year grew 5.3% last quarter compared with the year prior, the company said Tuesday, and its profit grew 8.2% last quarter. Walmart raised its financial outlook, a signal it expects a strong holiday shopping season.

Walmart said it gained market share last quarter, driven “primarily from upper-income households.” Households making more than $100,000 a year accounted for 75% of the company’s gains.

TJX, the parent of TJ Maxx and Marshalls, also posted strong results during its latest quarter. TJX’s sales at stores open at least one year increased 3% last quarter and it raised its guidance.

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