Target sounds the alarm bell on holiday shopping

New York
CNN
—

Target expects a surprisingly weak holiday shopping season, a potential warning sign for the retail industry.

The company predicted on Wednesday that sales in the final quarter of the year will be flat, and Target lowered its earnings forecast. Target also reported sluggish sales growth of just 0.3% during the most recent quarter.

Shares of Target ( TGT ) fell about 15% in early trading Wednesday.

Target is a bellwether for consumer spending habits and the retail sector as a whole. The Christmas shopping season is crucial for retailers. While Target can survive a weak holiday stretch, many smaller businesses rely on strong sales during the holidays to see them through the following months.

Target is struggling because its core middle-class customer base has been strained by higher prices and pulled back on discretionary items like home decor, electronics and must-have clothing in favor of groceries and everyday items.

“Consumers are telling us that their budgets remain stretched and that they are shopping carefully as they work to overcome the cumulative impact of several years of price inflation,” CEO Brian Cornell said on a call with analysts.

But Target has also fallen because of its merchandise mix and higher prices compared to rivals like Walmart. The chain stocks more non-essential items compared to competitors like Walmart (WMT) and Costco (COST). More than half of Target’s merchandise is discretionary, making it more susceptible than its competitors to swings in consumer sentiment.

“Target may be losing share among its middle- and upper-income consumers to retailers such as Amazon, Costco and Walmart,” Joseph Feldman, an analyst at Telsey Advisory Group, said in a note to clients on Wednesday.

Target has added more food and essential items to its stores in recent years, but still trails Walmart, which gets about half of its sales from groceries.

Target has cut prices on thousands of items in recent months to attract customers, but that had a limited impact on sales.

While Target struggles, other chains like Walmart are rising.

Walmart’s U.S. sales at stores open at least a year grew 5.3% last quarter compared with a year earlier, the company said Tuesday, and its profit grew 8.2% last quarter. Walmart raised its financial outlook, a signal that it expects a strong holiday shopping season.

Walmart said it gained market share last quarter, driven “primarily from higher-income households.” Households earning more than $100,000 a year accounted for 75% of the company’s gains.

TJX, the parent company of TJ Maxx and Marshalls, also delivered strong results in the latest quarter. TJX’s sales at stores open at least a year rose 3% last quarter, and it raised its guidance.