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Superstores: Target’s Kitchen Sink Year & Walmart’s Ongoing Grocery Momentum

Thomas Paulson
Aug 18, 2023
Superstores: Target’s Kitchen Sink Year & Walmart’s Ongoing Grocery Momentum



With Q2 2023 updated, Target offered “kitchen sink” expectations for the second half of 2023, saying that it was planning on a mid-single-digit decline in comparable-store sales for the remainder of the year. Given softer-than-expected revenue, the retailer's earnings guidance was also reduced by 10%.

Versus Q1 2023 sales trends, nearly all categories and channels all slowed. Beauty---one of our call-out categories of the year--increased by low double-digits and sales from the Ulta Beauty at Target store-in-stores doubled. Sales of discretionary categories, while still up double-digits from the 2019 baseline, moved lower by mid-teens from the previous quarter on a relative basis. Digital comparable sales fell -11%, and as drive-up sales grew +7%, home delivery sales were down a meaningful -20%. Management stated that the rollout of drive-up returns was meeting the average wait time objective of under three minutes. Starbucks as part of drive-up is the next enhancement.

In describing the consumer behavior shifts, Target CEO Brian Cornell noted that, “the impact of inflation in frequency categories like food & beverage and essentials [is] causing these categories to absorb a much higher portion of consumer's budgets.” (Recall that Campbells and other food producers have called out “retailer inventory destocking” as one of the factors to their weaker volume performance, which we recently discussed in greater detail.) Cornell also noted, “Against this cautious backdrop our team is laser-focused on delivering newness, quality, and affordability, reinforced by a commitment to retail fundamentals. Given the rapid growth and the volatility that our business has experienced over the last several years, we have an opportunity to refocus our team on four key factors that determine where consumers choose to shop: being reliably in stock, highlighting affordability throughout our assortment, presentation, and marketing, leveraging the proximity of our stores to the guests we serve, while ensuring a seamless, differentiated easy and inspiring guest experience on every trip, every day.” Target Chief Growth Officer Christina Hennington said, “we're highlighting the comprehensive value we provide through our $30-plus billion owned-brand portfolio. For example, threshold, our flagship-owned brand in-home just received a major facelift. With new branding, stronger price points, and a clarified aesthetic to help guests mix and match affordable styles for their homes this beloved brand will be even easier to love.”

Given the softer sales, inventory turns decreased quarter-over-quarter, but that is partially the result of Target shifting its inventory mix to lean into consumables. “Discretionary” inventory was down 25% year-over-year, which likely had a negative impact on vendors. To compensate for such order declines by typical customers like Target, Bed Bath & Beyond, Macy’s, and others, we suspect that vendors-- particularly in home categories--are selling into off-price and on marketplaces such as Amazon,, and others (a viewpoint supported by Amazon’s and’s recent results--especially during events like Prime Day, where home goods was the largest or the second largest category for the event based on industry reports).

On the intra-quarter trend, Target CFO Michael Fiddleke shared, "comparable sales in May were down a little more than -3%, moved down to a decline of just over -7% in June, then made an encouraging recovery to minus -5% in July.” However, per Placer data, the July improvement also reflects an easing comparison. Looking forward, Target faces steepening comparisons until early October, and so, while the underlying trend is improving, the year-over-year trend is unlikely in Q3 2023 given the steepening comparisons (one of the contributors to the soft second-half 2023 sales outlook).

Management cited strong results for the 4th of July and Circle Week – both of which we wrote about in prior reports. Hennington said, “Consumers continue to face difficult choices with every purchase whether managing their budgets in the face of higher prices or planning for resuming student loan payments, our guests are facing multiple ongoing challenges. With inflation rates moderating, however, we've started to see consumer confidence begin to recover from recent lows, and while we're maintaining an appropriately cautious outlook today, we're hopeful that conditions can improve with time.” Shown in the table below is how Target’s Captured Market has changed this year vs. last year. As shown, there is a very slight decline for more affluent households and those with an education level above a bachelor's degree. That may be due to a rising concern in these households about the restart of student loan repayments, and as such, a cut back in their spending. However, it's more likely that these households are spending more time as tourists, and on experiences than at this time last year.


On a non-related note and as it related to Swifties, Hennington said, “With that in mind and knowing how our guests can't get enough of Taylor Swift, we proactively secured an exclusive vinyl offering that Swifties bought in droves.” And on Barbie, Hennington said, “Before the recent release of the long-awaited Barbie Movie we collaborated with our vendor partners to secure exclusive items across multiple categories while adding a splash of pink style for Barbie fans of all ages. Barbie, along with Disney's The Little Mermaid, are the most recent examples of our long [record] of success in securing timely relevant product lines supporting key movie licenses across toys, Apparel, Home, Beauty, and Food, which have allowed us to consistently capture between 30%-60% market share with these properties.”

Target’s last quarter shined the light on theft-related shrink and organized crime, with Target suffering over $1B of theft compared to pre-pandemic levels. On this topic, Cornell noted, “Safety incidents associated with theft are moving in the wrong direction. During the first five months of this year, our stores saw a 120% threat increase involving violence or threats of violence.” Fiddelke stated, “We're working hard both inside our stores and with government and community partners to achieve lower loss rates over time and our long run expectation is that shrink rates will moderate from today's unsustainable levels but so far, we've only seen indications that loss rates might soon be reaching a plateau but have not yet seen evidence that loss rates will begin to come down.”



Similar to TJX Corp and Target’s more constructive tone on the consumer, Walmart indicated that discretionary spending was outpacing their expectations and that back-to-school was performing well. Speaking to just Walmart U.S. for the following. U.S. sales increased to $111B and trailing-twelve-month sales-per-square-foot hit $663 (including sales from Comparable-store sales for general merchandise were down -2%-3% (versus down -12%-16% at Target).

Grocery continues to be the driver of comps for Walmart, with grocery comps increasing at 4x the rate of the conventional grocery industry on a 1-year basis, and 2x on a 2- and 3-year basis (below).


Third-party sellers (similar to Amazon) and curbside (similar to Target) helped drive sales for the quarter, which increased +24% and now has hit a $62B annualized run rate versus Amazon's U.S. gross merchandise volume at $243B (i.e., is successfully scaling). U.S. profits increased +8% despite investing increasing amounts of gross profit dollars into remodels to “elevate” the store experience.

On store remodels and Walmart’s evolving brand positioning, CEO Doug McMillon said, “The remodel program...includes items to support our goal of becoming a regenerative company as we put things like new refrigeration equipment and EV charging stations in place...We recently announced a new collaboration focused on supporting U.S. and Canadian farmers to help improve soil health and water quality. Our collective goal is to enable and accelerate the adoption of regenerative agricultural practices on more than 2 million acres of farmland and deliver 4 million metric tons of greenhouse gas emission reductions and removals by 2030. Some days I still get amazed by all the good work happening across our company.” Put another way, Walmart is striving to be perceived by consumers as a “change agent for good” which aims to increase its market share--especially of high-income households--and to inspire purpose with its employees.

As it pertains to consumer behavior, McMillon noted, “As a global retailer, we see how our customers and members are affected by what's happening at a macro level and how that influences their behaviors. Jobs, wages and pockets of disinflation are helping our customers. But rising energy prices, resuming student loan payments, higher borrowing costs and tightening lending standards and a drawdown in excess savings mean that household budgets are still under pressure. I was in Calgary visiting stores a couple of weeks ago. And our Canadian customers are feeling the pinch of higher interest rates faster than in the U.S., given their shorter-term mortgages. When you put all this together, we see families that are discerning about what they're spending on. They're setting priorities and spending on the things they care most about. We saw that during the first half of the year with Chinese New Year and Easter and more recently with July 4 and the start of back-to-school, where sales are ahead of plan so far. We see them buying more private brand items. And they're buying more grocery staples and in-home meal options consistent with eating at home. Our customers and members are resilient. They're looking for value and they trust us to be there for them. We see people across income cohorts come to us more frequently looking to save money on everyday needs… The trends we see in general merchandise sales make us feel more optimistic about those categories in the back half of the year.” Looking at the dynamics between comp transactions and our visitation traffic, Walmart once again drove an improvement in its conversion rate, which suggests better consumer intent to purchase and strong retail execution (success in retail is getting the details right).

Walmart CFO John David Rainey shared, “Sales of general merchandise kitchen tools, like hand blenders and stand mixers, have inflected higher as customers are preparing more food at home...Over the last year, we partnered with suppliers to utilize rollbacks and offer select seasonal baskets of goods at the same prices as last year, essentially removing the impact of inflation. Customer response has been strong and sales have exceeded plan for events like Memorial Day, Fourth of July and our Walmart Plus Week savings event...Consumers are not compromising on some of the holiday seasons, so being choiceful in their spending, discerning. But around July 4 and some of the other holidays that we've seen, they're showing a willingness to spend. Our team is leaning into that, providing merchandise that they want to buy.” On grocery, Rainey said, “We're encouraged by the growth in units sold, particularly in food categories where disinflation is more pronounced, such as fresh meats, seafood and eggs. In addition, private brand sales in grocery were up more than 9% with penetration up nearly 40 basis points in Q2.” Walmart U.S. CEO John Furner said, “We have seen a number of rollbacks this year that are quite intentional. The results are really strong...from general merchandise to food, we are seeing rollbacks work across the business and customers are responding.”

As shown in the table below, Walmart U.S. increased the number of visitors by +1.3% year-over-year. However, those visiting less frequently and "trialing" the brand were up +4% (this is consistent with trends we've seen across the grocery category, where consumers are shopping a higher number of stores as they seek out the best deals). Those that are showing more loyalty (between 3-9 visits per month) increased by +2%. However, we are surprised by the decline in the high loyalty segment (9-29 visits). This may be due to some households trading down to deep discount--like Aldi or Grocery Outlet--or dollar stores. Recall that Grocery Outlet is producing gains of over +14% in unique visitors, with increases across all income segments. The decline in the 30+ frequency at Walmart is the decline in third-party delivery pickers that we have written about for the other grocers, which has been broadbased with the exception of Sprouts Farmers Market.


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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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