Target Tempers Expectations After Best Sales Gain in Years

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1:27Scarlet Fu:Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. I'm looking at Target reported earnings. Strongest sales gain in years, but they're a little cautionary, I think, in their guidance here. The stock's down 6 % here today, although it's up 22 % year to date. Jen Bartasha, she covers this part of the retail space for Bloomberg Intelligence. She joins us from the BI offices in Princeton, New Jersey.

2:07Jen, talk to us about Target. What did they report? What's their outlook? Yeah. Hi, Paul. So Target had a really good first quarter, much better than most people expected. And I think that it really is a reflection that some of the tactics they're putting in place as part of their turnaround are taking hold and that consumers are responding. But as you kind of sort of implied in your introduction, they really didn't nudge much with regards to their guidance in response to a strong fiscal first quarter. And so I think people are looking at that as a very conservative outlook for the rest of the year.

2:39Scarlet Fu:The comp sales for the quarter that ended was pretty eye-opening, up 5.6%. That was the biggest increase since the end of 2021, and also three times the average analyst estimate. Is this more than just easy comparisons? Well, in part, Scarlett, it's easy comparisons, but we also had other things like the tax refund season. There were some good tax refunds out there that people were spending. There were a few of those sort of tailwinds. And so when you strip that out, it's really about, you know, how much of this is sustainable going forward. And because the company didn't really adjust much of their guidance for the balance of the year, it really implies that that pace of same-store sales is going to drop way off starting in second quarter.

3:23Still positive, but in the very, very low single-digit range.

3:26Scarlet Fu:Right. Could this be a case of Target managing expectations to lower the bar so much that it becomes an easy beat later on? I think that it's not necessarily trying to really underestimate, but I think there is a level of conservatism there. And that's just really based out of the track record that they've had. When they go too soon in raising guidance, they get held with their feet to the fire. And then if they, for some reason, don't meet that, the stock gets hit even harder. And so I think that there's that level of prudence in there of saying it's only one quarter. There's four quarters in a year, three more to go.

4:04You know, let's see where we go. Now, if we get to second quarter and they have strong results and they don't make an adjustment, then I would say that they're definitely sort of under promising so they can over deliver. Talk to us about this, the turnaround. What is Target trying to do and are they making any headway there? Yeah, so a lot of the issues with Target, they sort of lost their way with what they used to deliver in that sense of like Target and the joy and the discovery. And so they're going back into sort of key topics and key categories where they think that they can be differentiated.

4:42So things like baby, things like beauty, areas of health and wellness where they think that they can have a competitive advantage and bring people back into stores. So they've been changing their assortment, changing what's in the stores. And at the same time, I think what's maybe underappreciated is the amount of work they've done with their backhouse operations in terms of supply chain to really improve availability of products in the stores. There's nothing more worse than a bad experience when you go in looking for something and it just isn't even there. So those are the kinds of like small wins that Target is starting to see that are helping to build a little bit of momentum.

5:18Scarlet Fu:Yeah, the comparison between Target and Walmart always seemed to be that Target appealed to the aspirational shopper in a way that Walmart hadn't quite mastered. Have those roles reversed? I mean, Walmart, we keep hearing about how there's a lot of customers trading down to Walmart now. Yeah, I would say Walmart has definitely invested in recent years in categories where Target had always been a leader. Apparel is a really good example of that. So, you know, Walmart has gone from being content of just being a fashion basics, where you go to buy your socks and your underwear, to being a little bit more fashion forward.

5:53And they have seen their apparel sales improving. So there's definitely more competition for Target in areas where they used to have a historical advantage. But we'll see whether this new refresh is going to be enough to overcome anything that they've lost. Jen, you talk to a lot of these retail companies. What are they saying about the inflation we're seeing out there in the economy, particularly at the gas pump? Yeah, it's a great question, Paul. And, you know, there are some reports out there that say that we haven't seen consumers have a huge reaction yet to the higher gas prices. When we look back historically, it's usually when gas prices are at a high level for a sustained period of time that you start to see consumer behavior shift.

6:37And that shift really takes place into going fewer stops, fewer retailers, maximizing your trips, that sort of thing. It's still a little early to see that much of a consumer reaction to high gas prices, which is why we haven't really seen that flow through in results yet. But the longer gas prices stay higher, the more that actually is an advantage to companies like Walmart and Target that have that broad assortment where people can make one stop and shop in multiple categories.

7:05Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this.

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9:03Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's talk about TJX, the owner of TJ Maxx. And in the UK, I think it's TK Maxx. Is that right? Yeah. I don't know why they changed the letter there, but Barry Ross Gilbert probably knows. She is our senior equity analyst covering retail. And TJX this morning came out with good earnings. Hiking is sales outlook, a real contrast to Target. But Mary, this is a very different company because this is a, you know, off-price retailer as opposed to Target, which has its own brands and doesn't claim to be off-price.

9:49That's exactly right, Scarlett. Really, the big difference here also is on the execution side. TJX is known for executing seamlessly. So they also guide conservatively and you expect them to beat every time. And they also surpass analyst estimates because analyst estimates are usually a tad above the guidance that the company provides. So yeah, there was a lot of strength in the quarter. And I think both TJX and also Target benefited from higher tax refunds in the quarter. And it does appear that Target is improving their execution, but they're also cycling a three-year stacked comp sales decline of 7.4%, whereas TJX is cycling a three-year stacked comp sales increase of over 9%.

10:41Again, the difference in the execution and the appeal of off price. And especially now that consumers are having to cope with higher gas prices.

10:51Scarlet Fu:Yeah. And then as earlier in your just recent broadcast there, you were talking about how the implications for that are raising costs of some products. And also, you know, we could get freight. Right now, we're not seeing that because there's been some hedging in place, for example, with Target. That was one of the benefits in their margin in the quarter was on the freight side, freight hedging. Mary, is there anything that TJX isn't doing well? You mentioned execution has been flawless, but that's kind of what investors expect from this company. What could it be doing better? Where is it perhaps leaving money on the table?

11:30Yeah, that's a good question, Scarlett. It seems I can't see where they're really leaving money on the table at this juncture. And if anything, what we continue to see every single quarter is the availability of excess merchandise. And this is across brands that span the appeal from consumers at the very low end to consumers at the very high end. So we're continuing to see a lot more luxury merchandise. It looked like in some of these shopping hauls that were posted, there's a lot of product from Celine, Gucci, Yves Saint Laurent. I mean, it's amazing how much out there in luxury. And we're seeing that luxury is off right now.

12:18And so now you can get it at discounted prices in the off-price channel, at least with TJX and their runway model. What's the growth strategy for a company like TJX? Is it more stores? Is it driving digital growth? Is it raising average selling price? What's kind of the growth story for a company like TJX? Yeah, so, Paul, that's a good question. For them, it's really continuing to expand. So that is opening up new stores and they are opening up more newer stores this year. I think they have on target over 100, but they're also expanding internationally, which is why they have these joint ventures in the Middle East.

12:58and they just entered Spain this year. So that's a new market for them. And then, of course, they also have an investment in Mexico. So they're sticking with the off-price channel, but expanding around the globe. And part of the reason why they're doing that is because they have seasoned executives that want to take on more responsibility, and this is a way to do it. So they continue to see a long runway. Not only in North America, for example, they're expecting to open somewhere around, I think it's like 7 ,000 stores. So they still have about 1 ,738 to go. So they have a big runway still. And by the way, they keep moving that target as they see more and more opportunities.

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17:09Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. All right, folks, our next segment is sponsored by John Tucker and all the do-it-yourself people out there. Drew Redding joins us here, Bloomberg Intelligence Home Building Analyst. Lowe's reported some numbers there, Drew. Are all those crazy people that actually do their work on their own homes, are they still buying stuff? It was largely an inline quarter for Lowe's, 0.6 % comp on same-store sales.

17:48They maintained their full-year guidance calling for flat to 2 % growth, which I think was encouraging. So I think the underlying trends in the business are relatively stable, but I think it still reflects a number of challenges out there. The most important being what we're seeing in the housing market, turnover still weak, about 20 % below normalized levels. We haven't seen that meaningful lift in spring demand that we were hoping for. And now we have rates back up to 6.75 % on housing, at least in the near term. At the same time, we've got consumer uncertainty, whether people are concerned about the outlook for economic growth, the outlook for employment.

18:32Now we have these geopolitical tensions. So all these are kind of weighing on that DIY consumer. And where we're seeing it, most importantly, is in a pullback in spending in those bigger ticket discretionary categories.

18:45Scarlet Fu:So for companies like Lowe's and Home Depot, they kind of have to wait out the cycle. They have to wait for things to improve. And that's a cyclical headwind that they really have no control over. Where they do have control over is to create more productivity, create more efficiencies. What is Lowe's doing on that front? Yeah, so you make a great point is they really can't battle what's happening in the housing market. What they have been doing is investing for when the market eventually turns. And where we've seen it from both retailers is really on the pro side. So Lowe's has done a lot of investments in crafting kind of a portfolio of products that pros really demand.

19:24They've worked hard on building out a loyalty program. They've done two pretty significant acquisitions of LBM and ADG, which will give them exposure, not only to kind of the larger pro where there's somewhat of an untapped addressable market for both of those retailers, but it'll also give them exposure to the home building space, which is an area that they have historically had no exposure. Now, as we've discussed before, the new home market is under similar pressure. We're seeing housing starts actually contract. But as you mentioned, it's really about positioning themselves for the next leg of growth when the housing market and the consumer starts to come back.

20:04Existing home sales bumping along around$4 million per year. Where should that number be in a healthy market? Yeah, so we've been there for a couple years. We're about 20 % or so below normalized levels. So we should be somewhere around the$5 million mark. You know, I think the fact that we've been bumping along these levels with all of the different challenges that we've had, you know, from rates to economic uncertainty to geopolitical uncertainty tells us that we're at a bottom. You know, we think that we can grow existing home sales low single digits in 2026 as more inventory starts to come onto the market.

20:42That's likely to come at the expense of home prices, which, you know, as we know, are up over 50 percent over the last several years. So, you know, for the home improvement retailers, the headwind associated with the existing home market has started to fade, but it just hasn't emerged yet as a catalyst for growth. Stay with us. More from Bloomberg Intelligence coming up after this. Support for the show comes from Public. Public is an investing platform that offers access to stocks, options, bonds and crypto. And they've also integrated AI with tools that can assist investors in building customized portfolios.

21:19One of these tools is called Generated Assets. It allows you to turn your ideas into investable indexes. So let's say you're interested in something specific like biotech companies with high R &D spend, small cap stocks with improving operating margins, or the S &P 500 minus high debt companies. Chances are there isn't an ETF that fits your exact criteria. But on public, you just type in a prompt and their AI screens thousands of stocks and builds a one-of-a-kind index. You can even backtest it against the S &P 500. Then you can invest in a few clicks. Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio.

21:57That's public.com slash market.