Target Corp. on Wednesday became the latest big U.S. retailer to announce disappointing quarterly earnings, with sales falling short of estimates and the outlook for the current quarter pretty grim.
The company’s executives were also the latest to display confusion — or perhaps it’s just denial — as to the reason why: Amazon.com Inc. is eating everyone’s lunch.
“I don’t know whether retailers just don’t want to admit it publicly, or whether they have not yet fully admitted it to themselves, but the Amazon effect is absolutely a part of these weak first-quarter results,” said Jared Wiesel, partner at pricing and revenue management consulting firm, Revenue Analytics.
“All roads point to the fact that Amazon is gobbling up share.”
Target TGT, -1.25% Chief Executive Brian Cornell admitted that sales were light on the company’s earnings call, according to a FactSet transcript.
“And daily and original shopping patterns were more volatile than in prior periods,” he said. “While guests generally maintained their pattern of larger, pantry stocking visits, we saw a slowdown in growth of smaller convenience trips.”
Target shares tumbled on the news and closed down almost 8%, marking their biggest one-day decline since December 2008.
Still, Cornell remained upbeat, saying the company “delivered outstanding first quarter financial results in a very challenging consumer environment.” The weak sales and guidance decline were due among other things to a shift in the Easter holiday and unusual weather in the three-month period, he said.
Last week, Macy’s Inc. M, -0.80% Chief Financial Officer Karen Hoguet noted high savings rates and the fact that some spending is going towards “different categories,” like health, travel and restaurants on the retailer’s earnings call last Wednesday. She also came right out and admitted her confusion.
“We’re frankly scratching our heads,” said Hoguet, according to FactSet. “We see the same economic data you all see and it would point to a customer that would be spending more. I think that gets to what he or she [is] spending it on.”
There are many factors at play, such as the much-discussed shift in consumer spending towards “experiences” over “stuff.” There’s also a demand for big-ticket items like cars that’s deferring money that would be spent at a department store onto other things, said Rob Plaza, senior equity research analyst at Key Private Bank.
Then there’s the footprint issue that traditional retailers are facing as e-commerce continues to grow.
“This highlights the problem that there are still too many stores,” said Plaza.
And there’s a lot of variety among the customers that department stores are trying to reach.
“They try to cater to so many demographics, they have so many product categories,” said Andy Wong, partner at Kurt Salmon. “It is a legitimate challenge to figure out these shifts and which ones are important.”
But people are spending money, as evidenced by the results at off-price retailers like TJX Companies Inc. TJX, -0.48% , at home-improvement retailers like Home Depot Inc. HD, +0.70% and Lowe’s Companies Inc. LOW, +0.25% , at J.C. Penney Co. Inc. JCP, -2.38% , which is moving away from apparel in order to turn around its business, and at Amazon AMZN, +0.31% , which posted its most profitable quarter ever in April.
Amazon is offering a positive customer experience with things like free shipping, fast fulfillment and access to the products people want at good prices, said Wiesel. The company is also staking its claim to a larger number of product categories and fostering customer loyalty through its Prime service.
“Who else gets to charge customers to become more loyal?” said Wiesel. “Winning back share of wallet from these customers is only going to get more difficult the more entrenched they become with Amazon.”
Traditional retailers offer valid reasons for their first-quarter problems, but the Amazon effect may be the most significant.
“There’s no question that all those elements they’re throwing out there explain part of it,” said Wiesel. “But that’s not all of it.”