Target flashes recession warning: Shoppers are buying fewer clothes and more necessities

By Nathaniel Meyersohn, CNN

Shoppers are pulling back at Target, Home Depot and other major chains as they face pressure from higher prices and borrowing costs.

Target's total sales ticked up 0.5% during its latest quarter from a year ago, the company said Wednesday. But digital sales fell, and the company said shoppers pulled back on discretionary purchases in what CEO Brian Cornell called a "very challenging environment" for consumers.

Target's (TGT) sales at stores open for at least one year increased 0.7%, and the company said customers were spending more on food and essentials. Profit fell 5.8% in the quarter.

It's the latest retailer to say shoppers pulled back on items like clothing and home goods and shifted to groceries and necessities. Lower and middle-income consumers have been squeezed the most by rising prices.

Neil Saunders, a retail analyst at GlobalData, said this was hurting Target because the chain relies on impulse purchases and shoppers filling their carts with items that catch their eye as they browse stores.

"The carefree shopping trip has been replaced by more focused missions where people set budgets and are less willing to deviate from them," he said in a note to clients.

Theft is growing

Target also warned that losses, driven by shoplifting and organized retail crime, will reduce its profitability by more than $500 million this year compared with a year ago.

Retailers in some areas of the country have said petty shoplifting, as well as organized groups stealing merchandise and reselling it online, have hurt their businesses. Target and other chains have locked products up to deter shoplifting.

But Target is one of the few chains to put an estimate on its losses, known in retail as "shrink." Shrink also comes from employee theft, miscanned products and other errors.

Retail shrink hit $94.5 billion in 2021, a 53% jump from 2019, according to the National Retail Federation's annual survey of around 60 retail member companies.

But the impact of shoplifting on retail losses may have been overstated in some cases.

Walgreens said it saw a spike in losses during the pandemic and cited organized retail crime in its decision to close five San Francisco stores in 2021. But it recently backtracked.

"Maybe we cried too much last year" about shrink numbers, a Walgreens executive said in January.

Target's stock fell slightly during pre-market trading Wednesday.