Target's (TGT) latest earnings report did not meet Wall Street's expectations, as the retail giant reported a 3% year-over-year decline in sales and missed estimates for adjusted earnings. Storch Advisors CEO Jerry Storch joins Catalysts to discuss what these results mean for the broader state of the consumer.

Storch suggests that the consumer slowdown has been brewing for some time, but its effects have been "disguised" by inflation. He notes, "The consumer is spending more and getting less, and they know it" — forcing consumers to prioritize essential expenditures like food and healthcare. With Target having "made its name around nice-to-have fun products," Storch argues this is what is causing the disappointing results.

When asked about Target's ability to turn the tide, Storch acknowledges the company's efforts to create value by reducing prices on 5,000 items. However, he doubts the effectiveness of this strategy, saying, "They're clearly trying to project value, but the problem is they're not really set up to do it."

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This post was written by Angel Smith

Video Transcript

Targets a disappointing earnings report this morning saw sales fall 3% year over year.

This is yet another example of consumers pulling back on certain discretionary items.

Targets report comes after Wal Mart said shoppers were trading into their stores and Macy's reported that consumers are being more discerning and spending for more on the polls of the consumer.

We have Jerry Stor advisors, CEO and former toys, Rs, Ceo.

Jerry, thanks so much for being here with us.

Obviously, you have incredible experience to bring us about what it's like to lead a retailer during difficult economic times.

So I'm curious from your perspective, does this earnings season indicate to you a potential downturn that we are about to see in the broader retail space?

I I think the consumer has been snowing for some time uh to some degree, this has been disguised oddly enough by inflation.

So the government reports, for example, the sales report that just came out uh recently said that sales during the month of April grew by 3.5% 3.7% something like that.

2.7 you look at just retail, but they don't factor out inflation inflation is more than the growth in retail sales.

So essentially what's happening is the consumer is spending more and getting less and they know it.

So that's what's been going on and then in an environment like that, uh whereas the consumer spend, well, they spend where they have to spend first.

So on necessities, on food, on, on that, on that core health and beauty care types of uh types of products.

And so, so that's what's been happening.

So, discretionary sales are simply not happening.

And Target being a retailer who's made its name on those kind of nice to have fun products like apparel, you know, cool apparel, uh electronics, home goods are kind of fancy, kind of fun, you know, chic, chic shabby, whatever, but uh Targets made its name in those discretionary cat and that's not what the consumer is buying right now.

Meanwhile, where they are buying, which is in these necessities I talked about Target has uh just simply doesn't have a strong value perception compared to Walmart or Costco or others.

And consumers saying I'm not gonna pay too much for it at Target.

I'm gonna go to Walmart.

So Jerry, then where does that leave this turnaround story?

When it comes to the fact that people simply are not going to target, they're not spending those discretionary items.

We have elevation uh inflation, excuse me, which it remains elevated but has improved just a bit.

How long is it going to take them for this turnaround story to play out.

Well, they're, they're doing a lot of things.

Well, and you saw just earlier this week that they, they knew this, obviously, that things were tough in this area.

That's why they just, this week they announced they're taking down prices on 5000 items.

And so they're, they're clearly trying to project value.

The problem is they, they aren't really set up to do it.

And so, for example, uh, uh, Target, uh, you know, years ago, about 20 years ago, made a strategic blunder to basically pull out of the full service grocery business.

What you have.

Target right now is really a large convenience grocery store.

Whereas Walmart is the nation's largest real grocery store with all the departments and fresh produce and everything else that you want and that positions target very poorly.

They can't fix that overnight.

They can't suddenly sort of snap their fingers across all these stores and have a real grocery store inside of them.

And so, so it's kind of a backwards hyper Mart at Target right now where, what you have is, uh, you know, Principal hypermart is, uh, you go to the grocery part every week and then you pick up the general merchandise at higher margin while you're there.

Targets kind of kind of backwards.

It's, uh, you go, you go by general merchandise once a month and while you're there, you pick up some low margin grocery this is a fundamental strategic blunder that target made about 20 years ago and put them in very bad shape compared to Walmart.

But there's a lot they can do and they're starting to do more of that, like emphasize price more, uh uh and so on and so forth.

But I also have to point out they've done this themselves on price integrity.

So they've, they've got a loyalty program that's very expensive.

And so they have to raise the everyday prices in order to pay for the loyalty program.

Uh, their ads are frequently full nowadays with, with Bogo, as we call them the business, you know, buy one, get a sale on something else.

Buy one, get a dis, get, get a, uh, a gift card discount, like on, uh, like on the laundry products, uh, detergent products, things like that.

So this undermines price integrity.

So our target has been working for some time against, uh, you know, actually hurting their price perception.

They aren't gonna fix it overnight.