Macy’s (M), Target (TGT), Dollar Tree (DLTR): Major retailers and a costly holiday season

The holiday season has started and it is the time for cheer but this year inflation is proving to be a major spoilsport for the festivities. As customers struggle to keep up the jolly spirit in shopping, retailers are working on making the experience as comfortable and affordable as possible for them. Here are some of the trends that retailers have been seeing and the plans they have laid out to make the best of the holiday season:

Inflation – a big wet blanket

Inflation remains at a heightened level thereby putting increased pressure on consumers’ spending ability. Amid rising costs, customers are giving more preference to essential items and putting discretionary purchases on hold. Target Corp. (NYSE: TGT) saw strong growth in categories such as food and beverage and household essentials during the third quarter of 2022 while discretionary categories witnessed continued softness.

Dollar Tree (NASDAQ: DLTR) saw its consumables category outperform the discretionary category for the second consecutive quarter in Q3 2022. The company saw comp performance pick up throughout the quarter in both its segments with October being its strongest month. Consumables comp grew 9.3% in the Dollar Tree segment and 4.7% in the Family Dollar segment during the quarter.

Target’s comp growth, however, varied through the quarter. After rising well over 3% through the first two months, comps slowed down to just under 1% in October. This was mainly caused by the impact of heavy promotions on sales.  

Due to inflationary pressures, customers are increasingly looking to purchase items at discounted rates than full price. This trend has hurt the margins of retailers like Target and Macy’s (NYSE: M). In Q3, Target’s gross margin dropped to 24.7% from 28% a year ago while Macy’s gross margin was 38.7%, down from 41% last year. Dollar Tree’s gross margin improved by 240 basis points in Q3 but was negatively impacted by the shift in product mix towards low-margin consumables.

Holiday preparations

Retailers are looking to make the holiday shopping experience as convenient and enjoyable as possible for customers. As part of these efforts, they have entered into partnerships to expand their assortments.

Target has teamed up with British retailer Marks & Spencer to provide an assortment of gourmet, premium food and chocolates which would make good gifting solutions through the holiday season. Target has also adjusted its prices on items like Christmas ornaments, candle assortments, and gifting assortments across categories like beauty, home and apparel.  

Another important category during the holidays is toys. Target has partnered with Disney to offer Black Panther merchandise for the holiday season while Macy’s has introduced permanent Toys “R”Us shop-in-shops within all its locations. Macy’s expects holiday shopping patterns to be similar to 2019.

Outlook

For the fourth quarter of 2022, Target expects comps in the discretionary category to be softer than the last two quarters, partly offset by strength in the frequency businesses. It also expects further pressure on margins from discounts during the quarter.

Macy’s expects Q4 sales to range between $8.1-8.4 billion while adjusted EPS is expected to be $1.47-1.67. Gross margin is expected to be no more than 270 basis points lower than 2021. Dollar Tree expects its net sales for Q4 2022 to be $7.54-7.68 billion while same-store sales are estimated to increase in the mid to high single digits. The discount store expects consumables to outpace discretionary during the quarter which will have a negative impact on gross margin.

Dollar Tree’s shares have gained 7% year-to-date while Target and Macy’s stocks have dropped 29% and 9% respectively during the same period.

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