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Why Target Investors Were Nervous on Thursday Morning


What happened

Shares of Target (TGT -3.77%) slipped on Thursday, falling as much as 3.8%. As of 12:10 p.m. ET today, the stock was still down 3.5%.

While the general market malaise no doubt pressured the stock, news that the retail store was kicking off the holiday shopping season early gave investors pause.

So what

In a press release, Target announced its plans for the all-important holiday shopping season. The company said it will begin discounting merchandise “earlier than ever” this year, beginning with its “biggest ever Target Deal Days event,” which will take place Oct. 6 to 8. The event will offer shoppers “the earliest access ever to deep holiday deals on must-have items and everyday essentials.”

The company is also extending its holiday price-match guarantee, beginning Oct. 6 and running through Dec. 24. The deal provides that if Target lowers the price on a purchased item later in the season, the retailer will match the lower price.

On a related note, Target said it planned to hire 100,000 seasonal employees to handle the increased holiday shopping demand at its stores and supply chain facilities. That’s roughly the same number of seasonal workers the company hired this time last year.

Now what

Given the state of the overall economy, investors are no doubt considering the ramifications of a longer holiday shopping season. Earlier deals, deeper discounts, and greater competition will likely continue to weigh on already pressured operating margins.

When Target announced its second-quarter results, the company said lower operating margins were a result of tighter gross margins and price reductions to reduce excess inventory. At the same time, management said it reduced its exposure in discretionary categories and invested more heavily in faster-moving items.

Inflation has eased somewhat, but is still near 40-year highs, causing consumers to make tough decisions at stores and fuel pumps. A longer shopping season and deeper discounts might attract more holiday shoppers, but it’s a double-edged sword, increasing margin pressure as well. As a result, Target investors might just end up with coal in their stockings.

 

Danny Vena has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.





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