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MINNEAPOLIS, May 20, 2024 /PRNewswire/ -- Target Corporation (TGT) announced today it will lower everyday regular prices on approximately 5,000 frequently shopped items...

When I first saw Target's announcement (above) concerning merchandise price cuts, I had several questions. First, I wondered whether this was something peculiar to Target, or something indicative of bigger problems for the retail industry. But, that was not what concerned me the most. A more important question is whether Target's woes are symptomatic of a fundamentally weak economy.

My own impressions of Target from a consumer's perspective is that it is a fairly popular brick and mortar store with a variety of products which are moderately priced. I am not impressed with the grocery department and I don't shop there for groceries. Otherwise, I find myself stopping by for a specific item or two from time-to-time. Given that I think most others who shop there find more to their liking and do so more often, I also wondered "Why is Target experiencing this problem?"

Apparently, Target's prices are not as "consumer friendly" as I had assumed. In fact, my wife, who works in Campus Recreation Department for Utah Tech University, related a story concerning the purchase of some needed supplies. The supplies are normally ordered online via another source. The words used were "expensive" and "over-priced."

Target's own announcement and articles about it are universal in their indication that the purpose of the price(s) reduction is to attract customer traffic and increase sales. Recognition is given to inflation and the toll that higher prices have extracted on consumers.

Is it Target's niche market that is suffering more from the effects of inflation? Or, is this something that is happening to others in the retail industry or throughout the economy. For example, can we expect a similar announcement from Walmart in the future?

Some additional questions: 1) Will this round of price cuts for Target be enough to draw sufficient traffic into the stores? 2) Will additional traffic translate into higher sales volume AND net profits for Target?

Normally, the higher consumer prices associated with inflation help compensate the retailer for their own higher costs to bring goods to the marketplace. It seems logical then, that if those higher prices are necessary to cover costs, and that customer traffic is declining; then, how can price reductions, even if they accomplish the primary purpose (to attract customer traffic), make up for the absorption of higher costs by the retailer? A smaller profit margin will require a lot more sales revenue to maintain profitability.

This begs the question, "Is one round of price cuts enough?" Further price reductions can only be undertaken if the profit margin is large enough to accommodate them. Otherwise, the purpose changes to just an attempt to accelerate cash flow; albeit temporarily.

If Target's problems are not unique, then the entire retail industry might be in trouble. Depending on how widespread and how deep the issues are, then the indications for the economy as a whole are ominous.

Below is a chart of retail sales...

Real (inflation-adjusted) Retail Sales Historical Chart
 

As can be seen in the chart above, real (inflation-adjusted) retail sales peaked three years ago, in April 2021. The decline since then has been somewhat volatile, but a bigger concern would be the possibility of a slowing economy which leads to further significant declines. What we experienced in 2020 could be a precursor to something similar. This time, though, it could be worse and last longer.

CONCLUSION 

Investors should exercise caution regarding the stocks of Target and other retailers. As far as Target is concerned, their problems seem to be broader than just that which might be inferred by their own pricing structure complications. In other words, the problems are bigger than just competitive pricing. Consumers can enjoy the lower prices at Target for now, but there may be similar announcements and actions from other retailers soon. Target's announcement and others that may follow are more likely indicative of a broadly weak economy. 

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