The S&P/ASX 200 Consumer Discretionary Index is a clear outlier on Wednesday, likely facing selling pressure due to a second profit downgrade from US-listed Target.
Wesfarmers (ASX: WES) is the most notable large cap loser, down -1.4% in early trade to a fresh 20-month low of $44.94.
Two weeks ago, Target shares plummeted -25% in a single day after reporting weaker-than-expected earnings due to higher freight costs, a rapid slowdown in discretionary sales and product markdowns.
Target issued another earnings downgrade on Tuesday, now expecting second-quarter operating margins to be around 2% compared to analyst expectations of 5.3%.
The retailer said it has taken a set of actions to “right-size its inventory … including additional markdowns, removing excess inventory and cancelling orders.”
“Specifically, the Company is planning for continued strength in frequency categories like Food & Beverage, Household Essentials and Beauty, and is planning more conservatively in discretionary categories like Home.”
Target said it expects operating margins to bounce back to 6% in the second-half of 2022, a rate that would exceed historic averages for the Fall season.
Too much inventory has taken a massive toll on profit margins
US consumption for staples remains solid
US consumption of discretionary segments has weakened
There is a light at the end of the tunnel, margins expected to normalise in second-half
It's also worth noting from Australia's March quarter GDP data observed a solid increase in household spending across "a number of discretionary categories."
"Household consumption continued to drive growth this quarter. Following the easing of COVID-19 restrictions, household spending on Transport services, Hotels, cafes and restaurants, and Recreation and culture increased." said Sean Crick, acting head of National Accounts at the ABS.
Several ASX-listed retailers like Breville Group (ASX: BRG), ARB Corp (ASX: ARB) and Super Retail Group (ASX: SUL) are down more than -25% year-to-date after experiencing a massive pull forward in earnings and valuations in 2021-22.
Right after Target's initial -25% dip on May 26, I looked at a few potential ASX culprits including Super Retail and Breville - both of which boosted inventory levels to mitigate supply chain disruptions.
Finance Writer & Social Media
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