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A steep Q3 (Oct) earnings miss, decelerating revenue growth, and gloomy guidance are sending shares of Target (TGT -20%) down to levels not experienced since November 2023. Expectations may not have been soaring ahead of the big-box retailer's Q3 report today as shares were up around just +9% on the year. However, accelerating same-store growth from rival Walmart (WMT) in OctQ did make investors feel rather optimistic about how TGT may perform in the quarter.

That positivity has been wiped away today as TGT's relatively higher exposure to discretionary categories compared to WMT weighed considerably on Q3 results. Around 60% of WMT's U.S. sales stem from groceries, with only a fourth coming from general merchandise. TGT's exposure is essentially the inverse, with just under a fourth of its FY24 (Jan) revenue comprised of Food & Beverage. In a climate bogged down by cumulative inflation, shoppers are consolidating trips and holding off on big-ticket items, disproportionately hurting TGT.

Frustratingly, challenges are expected to stay over the near term, influencing TGT's disappointing Q4 (Jan) forecasts, including flat comps and EPS of $1.85-2.45, representing a 28% decline yr/yr at the midpoint. TGT also cut its FY25 EPS outlook to $8.30-8.90 after raising it last quarter to $9.00-9.70.

• In Q3, TGT's revenue inched 0.9% higher yr/yr to $25.23 bln, slowing from 2.7% last quarter. Same-store sales were +0.3%, landing toward the lower end of its +0.0-2.0% forecast. Comps softened considerably versus a +2% improvement in Q2, reflecting a sharp reduction in discretionary demand and average ticket. Discouragingly, lackluster sales unfolded even as TGT lowered prices on thousands of goods this year, eyeing price reductions on over 10,000 items by year's end.
• A glum combination of lower prices and weaker sales eroded operating margins by 60 bps yr/yr in Q3, fueling TGT's earnings miss, as EPS compressed by 12% yr/yr to $1.85. The impact of merchandise mix on margins was roughly flat in the quarter, down from a decent-sized benefit in Q2, illuminating a rapid slowdown in TGT's highest margin Apparel and Home categories, whose comps decelerated by 4 pts sequentially.
• Among the rough patches were a few bright spots. Traffic sustained its low single-digit yr/yr growth in the quarter, highlighting TGT's guest-focused strategies. Meanwhile, Digital comps surged by +11%, supported by nearly 20% growth in TGT's same-day delivery service and double-digit growth in its drive-up service, which accounted for approximately 8% of Q3 revs. Category-wise, Beauty boasted over +6% comp growth, and Food & Beverage and Essentials both saw low single-digit comps.

Shoppers spending cautiously in Q3, hesitating to buy until the last minute and prioritizing deals took a massive bite out of TGT's performance. What made results so deflating was that just last quarter, TGT delivered upbeat comp growth on improving trends across discretionary categories and raised its FY25 guidance. Such a rapid 180 underscores a retail environment still operating on shaky ground as the cumulative effects of inflation continue to squeeze budgets and produce elevated volatility from quarter to quarter.