Target Has A Bad Holiday Shopping Season

Solid Redbook Growth, But Target Misses Estimates

In the week of January 11th, Redbook same store sales growth was 5% which fell from 6.1%. That’s still strong growth though as the first half of the month looks solid. Based on the initial data points, it’s possible seasonally adjusted yearly retail sales growth in January is higher than December. 

On the negative side, Target reported holiday sales results that missed estimates by a long shot. It was clearly incorrect to describe Target as one of the winners this holiday season. Its results weren’t as bad as the other department stores. But given its rally in the past year, everyone expected much better. Prior to this decline, it was up 83.64% in the past year. And it fell 6.59% on Wednesday because of the results we'll discuss next.

Since Target was supposed to have a strong holiday season and has a big market share in retail, it makes me question 2 things. Firstly, can any brick and mortar stores do well with sales moving online? Even Target, which has a sound online strategy, was hammered. Even the winners in retail aren’t doing that great. 

Secondly, it makes me question is how strong retail sales in December were. I have been positive mostly because I expect online sales growth to explode. Even though Target lost out to online and changing consumer tastes, it still makes one wonder how strong the retail sales report will be. 

On Thursday, the December retail sales report is expected to show 0.4% monthly headline sales growth and 0.4% control group sales growth. If the consumer has a weak Q4, real final sales growth will be terrible. Trade will still drag GDP growth to at least 1.5%, saving the economy from flirting with a negative reading.

Specifics Of Target’s Release

Target didn’t report earnings. Its earnings report won’t come out until March 3rd. However, it did update investors on its holiday season same store sales growth which was bad. Same store sales growth was 1.4% in November and December which was down from 5.7% last year. Target will have its 11th straight quarter of positive same store sales growth, but it looks like it is running out of steam. 

Target’s prior outlook for Q4 same store sales growth was between 3% and 4%. Now it’s near where its holiday sales growth was. Analysts expected Target’s same store sales growth to be 3.8% in Q4 which means its growth will be about half the consensus.

The CEO of Target stated, Target “faced challenges throughout November and December in key seasonal merchandise categories.” He added in another blog post, “While we knew this season was going be challenging, it was even more challenging than we expected.”

Target had strength in apparel and beauty, but weakness in electronics, toys, and parts of its home business. Target missed expectations in its toy business. The firm partnered with Disney to open mini Disney shops in some stores. It’s also powering the Toys R Us website. Even with this effort, toy sales were flat this holiday shopping season. Electronics sales were down 6% in November and December. Yet overall retail industry electronics and appliances sales growth was 4.6% from November until Christmas Eve. 

Home item sales were down 1% which was below the overall category’s growth of 1.3%. On the other hand, apparel sales were up 5% which beat the category by 4%. Finally, food and beverage sales were up 3%.

Target’s online sales growth was 19% which is probably only slightly above overall online sales growth. Its use of same day options such as curbside pickup was up 50% from last holiday season. This drove 75% of Target’s online sales growth.

Modest Decline In Small Business Sentiment

In December, the NFIB small business optimism index fell modestly as it was down from 104.7 to 102.7 which missed estimates for 104.4 and the low end of the consensus range which was 103.5. Even still, as the chart below shows, it is near the high end of its historical range. There were mostly negative changes under the surface of this report with particular weakness in earnings trends.

6 categories fell from last month and 2 were up. The net earnings trends reading was down 10 points to -8%. I was surprised by its prior move higher because margins had been contracting. Weirdly, now that we’ve seen a big decline in production and non-supervisory wage growth, the index is moving lower. 

It doesn’t make much sense. This whole index has likely been too high in 2019 considering the pressure from wage inflation and from big companies which have been outperforming small ones in the stock market.

A net 4% fewer firms said now is a good time to expand. That’s down to 25%. Remember, we’ve seen 2 straight quarters of negative business investment growth and are about to see the 3rd in Q4. Net percentage showing current job openings fell 5 points to 33%. We’ve seen a slowdown in yearly job growth. There would be a pronounced decline in the 3 month moving average if it wasn’t for the great November reading. 

It wouldn’t be surprising if at some point this year, the 3 month average of job creation dips below 100,000. Labor market is tight. On the positive side, the net percentage expecting the economy to improve and the net expecting real sales to be higher both rose 3 points to 16%.

Conclusion

Target reported terrible holiday sales growth. Let’s see if that’s a bad sign for the retail sales report. We only need to wait a day from Target’s sales release until the report. We've been expecting a solid retail sales report which pushes up Q4 real consumption growth estimates. 

December NFIB small business confidence report was solid. Earnings trends index hasn’t been negatively correlated with wage inflation recently. Why is it decreasing now that we’ve recently seen a decline in wage inflation? I think job creation growth will fall in 2020 even though the manufacturing sector will rebound. And, I also think business investment will end its streak of negative growth in 1H 2020. 

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