Target CEO says consumers are still spending, but sees pressure on discretionary items

Speaking in a conference call before market open, Target
TGT,
+17.64%
Chief Executive Brian Cornell the company saw soft industry trends in discretionary categories, as well as higher inventory shrink.

Related: Target CEO says consumers are cutting back — even on food spending

“Overall, consumers are still spending,” he said, but cited factors such as higher interest rates and the resumption of student loan repayments as things that are affecting discretionary purchases.

Consumers have also been delaying their buying, according to the CEO. Cornell explained that purchases of colder-weather items such as denim and sweaters, which would typically have happened in August, have been pushed back. This a clear indication of the pressures consumers are feeling, he added.

Other retail giants have cited discretionary spending pressure this earnings season. On Tuesday Home Depot Inc.
HD,
+1.40%
said that it is seeing pressure in certain big-ticket, discretionary categories.

Related: Retail ‘shrink’ is about much more than theft, analysts say

The stock
TGT,
+17.64%
powered up 13.6% toward a three-month high in premarket trading. That would put it on track for its one-day performance since the record 20.4% rally on Aug. 21, 2019.

Net income for the quarter to Oct. 28 rose to $971 million, or $2.10 a share, from $712 million, or $1.54 a share, in the same period a year ago, boosted by “disciplined inventory and expense management.”

Excluding nonrecurring items, adjusted earnings per share rose to $2.10 from $1.54, while the FactSet consensus was for a decline to $1.47.

See now: Mortgage rates plunge amid signs of a weakening consumer

Sales fell 4.3% to $25.004 billion, below the FactSet consensus of $25.285 billion.

Same-store sales were down 4.9%, as the number of transactions was down 4.1% and the average transaction amount slipped 0.8%, but that beat expectations of a 5.3% fall. In a statement, the company said weakness in discretionary categories offset continued strength in “frequency” categories, most notably in beauty.

Cost of sales declined more than sales, down 7.8% to $18.15 billion, and the value of inventory held as of Oct. 28 fell 13.9% from last year to $14.73 billion.

Related: Home Depot CEO says 2023 ‘a period of moderation’ in home improvement spending

For the fourth quarter, the company expects adjusted EPS in a wide range of $1.90 to $2.60, which surrounds the current FactSet consensus of $2.23. Same-store sales are expected to decline in the mid-single digit percentage range, compared with the FactSet consensus of a 5.3% fall.

Target’s stock has dropped 11.4% over the past three months through Tuesday, while rival shares of Walmart Inc.
WMT,
+0.92%
have gained 5.3% and the S&P 500
SPX,
+0.37%
has tacked on 1.3%.