June 8, 2022

Breakingviews: Target joins the growing bad forecasters’ club

by Breakingviews.

Know your customer: it’s the golden rule of retail, and one that U.S. store chain Target seems to have flunked. The company slashed its forecast operating margin by more than half on Tuesday because of an excess of unsold goods. It’s one of many companies whose outlook has gone awry since the start of the Covid-19 pandemic. For retailers, the consequences of getting it wrong are especially painful.

Target’s profit warning looks worse because it had been such a high-flier. Its shares are up 180% over the past five years – outperforming Amazon.com. Even so, it’s no secret that consumers shifted their spending from services to goods during the pandemic, and it ought not to be a surprise that they’re shifting back. In April, Americans increased their spending in restaurants and bars 20% year-over-year while purchases on building materials and garden supplies slowed to 2% growth, according to the U.S. Census Bureau.

At least Target is in good company. Walmart is grappling with similar problems as its shoppers opt for lower-margin groceries including private label brands, and has reduced its profit outlook for the year. Amazon lost money during the first quarter, admitted it has too much warehouse capacity and said the executive in charge of its consumer business, Dave Clark, is leaving. All have invested heavily in the past to build a trove of data on how their customers shop.

Even big banks – which should also know consumers better than anyone – have got it wrong. JPMorgan, Bank of America and peers set aside huge sums to cover bad debts when Covid-19 hit, only to find that consumers have remained curiously creditworthy. JPMorgan stowed away $20.8 billion of so-called loan loss provisions, yet has unwound $11.1 billion of them. As boss Jamie Dimon said in April: “everybody forecasted, and everyone’s wrong all the time.”

The big difference is that when banks pile up more provisions than they need to cover future problems, they can always change course later and use the money elsewhere. That’s not true for retailers facing piles of unwanted TVs and toasters. Worse, Target said in May that its inventory was up by 43% year-on-year, yet it took three weeks to spell out the effect on its profit margin. Its shares are down a third this year so far. Those who don’t know their customers will struggle to please their investors.

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