Consumer behaviors continue to shift in the wake of tremendous global changes post-lockdowns, including greater digital engagement, inflation, and supply-chain challenges. It's enough to roil the markets, which is what's been happening as a result.
The current market sell-off has a different feel from the March 2020 version, which was sudden, dramatic, and quick. In the wake of those few awful weeks, investors sensed rising opportunities and piled in money accordingly. That led to astronomical valuations as pandemic-friendly companies posted soaring growth.
But the party didn't last, and only two years later, there's a lot of uncertainty about how this is all going to play out.
Image source: Target.
This came into sharp focus last week when both Walmart (WMT 0.25%) and Target (TGT 0.80%) released disappointing first-quarter earnings. After two years of fabulous growth, the situation has changed. That's mostly due to macroeconomic factors beyond the companies' control. Perhaps it was inevitable to some degree, and here we are now.
But it's not all bad. Even in the disappointment, there were optimistic signs. Here are three rays of light from Target's first quarter.
1. Comps were positive
Following up on a 23% year-over-year increase in comparable-store sales last year, comps increased 3% on top of that in the 2022 first quarter (ended April 30). Despite inflation and shifts away from products to travel and experiences, shoppers are still spending at Target.
Sure, some of that has to do with inflation itself as certain products now cost more. But traffic increased 4% over last year in the first quarter, and it's a testament to Target's business model that customers are continuing to spend their money at its stores.
2. There were plenty of hot categories
Notwithstanding the slowdown, several categories demonstrated higher market share or double-digit comps growth over last year. Management is identifying and investing in those categories as it works to generate similar growth in other categories. It operates an agile system where it can determine what products are popular and pump resources into these faster-growing categories. This should lead to improved overall sales in the future.
Beauty was a particular standout with comps increasing by double digits year over year. Target recently signed a deal with Ulta Beauty for Ulta store-in-stores, and it says it's working to "enhance presentation, assortment, and service." It also took greater market share in food and beverage and essentials.
3. Management is careful about price increases
Target is relentless about maintaining its position as a discount shopping king, and it's carefully deciding what cost increases it can and cannot pass on to customers. As it absorbs much of its own increases in cost, it creates loyalty among shoppers, helping to keep them around until pricing pressures lift. CEO Brian Cornell said, "As we currently monitor our prices and quality stack up versus the competition, our guest is telling us they appreciate the value and experience we're providing."
What does it mean for the investor?
If you want to be a successful investor, you have to be prepared to ride out the dips on the path to gains and not freak out when they happen. Instead, seek out new opportunities when the market takes a step back. Before you choose stocks to buy, consider the company's business fundamentals and potential, and brace yourself to endure the inevitable setbacks.
Target has the management, business model, and market in place to keep on winning. Hold tight and focus on the rays of light.
