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Target Tempers Expectations After Best Sales Gain in Years · Bloomberg Intelligence

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  Speaker 2: I'm looking at Tarja Target report at earnings, strongest sales
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  Speaker 2: gaining years, but they're a little cautionary. I think in
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  Speaker 2: their guide it's here the stocks down six percent here today,
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  Speaker 2: although it's up twenty two percent year to date. Chen
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  Speaker 2: Bartash as she covers this part of the retail space
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  Speaker 2: for Bloomberg Intelligence, She joins us from the BI offices
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  Speaker 2: in Princeton, New Jersey. Jen talk to us about Target.
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  Speaker 2: What did they report? What's their outlook?
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  Speaker 3: Yeah, hi, Paul, So, Target had a really good first quarter,
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  Speaker 3: much better than most people expected. And I think that
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  Speaker 3: it really is a reflection that some of the tactics
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  Speaker 3: they're putting in place as part of their turnaround are
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  Speaker 3: taking hold and that consumer are responding. But as you
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  Speaker 3: kind of sort of implied in your introduction, they really
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  Speaker 3: didn't nudge much in with regards to their guidance in
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  Speaker 3: response to a strong fiscal first quarter, and so I
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  Speaker 3: think people are looking at that as a very conservative
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  Speaker 3: outlook for the rest of the year.
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  Speaker 4: The comp sales for the quarter that ended was pretty
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  Speaker 4: eye opening, up five point six percent. That was the
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  Speaker 4: biggest increase since the end of twenty twenty one, and
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  Speaker 4: also three times the average anaal assessment. Is this more
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  Speaker 4: than just easy comparisons?
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  Speaker 3: Well, in part, Scarlett, it's easy comparisons, but we also
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  Speaker 3: had other things like the tax refund season. There were
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  Speaker 3: some good tax refunds out there that people were spending.
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  Speaker 3: There were a few of those sort of tailwinds, and
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  Speaker 3: so when you strip that out, it's really about, you know,
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  Speaker 3: how much of this is sustainable going forward? And because
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  Speaker 3: the company didn't really adjust much of their guidance for
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  Speaker 3: the balance of the year, it really implies that that
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  Speaker 3: pace of same store sales is going to drop way
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  Speaker 3: off starting in second quarter. Still positive, but in the
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  Speaker 3: very a very low single digit range.
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  Speaker 5: Right.
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  Speaker 4: Could this be a case of target managing expectations to
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  Speaker 4: lower the bars so much that it becomes an easy
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  Speaker 4: beat later on.
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  Speaker 3: I think that it's not necessarily trying to really like
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  Speaker 3: under underestimate, but I think there is a level of
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  Speaker 3: conservatism there, and that's just really based out of the
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  Speaker 3: track record that they've had. When they go too soon
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  Speaker 3: and raising guidance, they get held with their feet to
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  Speaker 3: the fire, and then if they for some reason don't
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  Speaker 3: meet that, the stock gets hit even harder. And so
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  Speaker 3: I think that there's that level of prudence in there
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  Speaker 3: of saying it's only one quarter, there's four quarters in
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  Speaker 3: a year, three more to go. You know, let's let's
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  Speaker 3: let's see where we go.
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  Speaker 6: Now.
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  Speaker 3: If we get to second quarter and they have strong
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  Speaker 3: results and they don't make an adjustment, then I would
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  Speaker 3: say that they're definitely sort of under under promising so
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  Speaker 3: they can over deliver.
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  Speaker 2: Talk to us about this the turnaround. What is Target
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  Speaker 2: trying to do and are they making any headway there?
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  Speaker 3: Yeah, so you know a lot of the issues with Target,
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  Speaker 3: they sort of lost their way with what they used
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  Speaker 3: to deliver in that sense of like targe and the
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  Speaker 3: joy and the discovery, and so they're going back into
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  Speaker 3: sort of key topics and key categories where they think
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  Speaker 3: that they can be differentiated, so things like baby, things
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  Speaker 3: like beauty, areas of health and wellness where they think
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  Speaker 3: that they can have a competitive advantage and bring people
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  Speaker 3: back into stores. So they've been changing their assortment, changing
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  Speaker 3: what's in the stores. And at the same time, I
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  Speaker 3: think what's maybe underappreciated is the amount of work they've
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  Speaker 3: done with their back house operations in terms of supply
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  Speaker 3: chain to really improve availability of products in the stores.
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  Speaker 3: There's nothing more worse than a bad experience when you
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  Speaker 3: go in looking for something and it just isn't even there.
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  Speaker 3: So those are the kinds of like small winds that
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  Speaker 3: Target is starting to see that it's helping to build
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  Speaker 3: a little bit of momentum.
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  Speaker 4: Yeah, the comparison between Target and Walmart always seem to
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  Speaker 4: be that Target appealed to the aspirational shopper in a
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  Speaker 4: way that Walmart hadn't quite mastered. Have those roles reversed,
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  Speaker 4: I mean Walmart, we keep hearing about how there's a
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  Speaker 4: lot of customers trading down to Walmart.
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  Speaker 3: Now, Yeah, I would say Walmart has definitely invested in
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  Speaker 3: recent years in categories where Target had always been a leader.
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  Speaker 3: Apparel is a really good example of that. So, you know,
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  Speaker 3: Walmart has gone from being content of just being a
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  Speaker 3: fashion basics where you go to buy your socks in
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  Speaker 3: your underwear to being a little bit more fashion forward,
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  Speaker 3: and they have seen their apparel sales improving, So there's
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  Speaker 3: definitely more competition for target in areas where they used
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  Speaker 3: to have a historical advantage. But we'll see whether this
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  Speaker 3: new refresh is going to be enough to overcome anything
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  Speaker 3: that they've lost.
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  Speaker 2: Jen, you talked to a lot of these retail companies.
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  Speaker 2: What are they saying about the inflation we're seeing out
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  Speaker 2: there in the economy, particularly at the gas pump.
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  Speaker 3: Yeah, it's a great question, Paul, And you know, there
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  Speaker 3: are some reports out there that say that we haven't
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  Speaker 3: seen consumers have a huge reaction yet to the higher
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  Speaker 3: gas prices. When we look back historically, it's usually when
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  Speaker 3: gas prices are at a high level for a sustained
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  Speaker 3: period of time that you start to see consumer behavior shift,
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  Speaker 3: and that shift really takes place into going fewer stops,
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  Speaker 3: fewer retailers, maximizing your trips, that sort of thing. It's
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  Speaker 3: still a little early to see that much of a
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  Speaker 3: consumer reaction to high gas prices, which is why we
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  Speaker 3: haven't really seen that flow through in results yet. But
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  Speaker 3: the longer gas prices stay higher, the more that actually
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  Speaker 3: is an advantage to companies like Walmart and Target that
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  Speaker 3: have that broad assortment where people can make one stop
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  Speaker 3: and shop in multiple categories.
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  Speaker 4: Stay with us more from Bloomberg Intelligence coming up after this.
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  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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  Speaker 4: Let's talk about TJX, the owner of tj max and
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  Speaker 4: in the UK, I think it's tkmax. Yeah, I don't
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  Speaker 4: know why they changed a letter there, but Barry Ross
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  Speaker 4: Gilbert Polly knows. She is our senior equity analyst covering
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  Speaker 4: retail and TJX this morning came out with good earnings,
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  Speaker 4: hiking its sales outlook a real contrast to Target. But Mary,
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  Speaker 4: this is a very different company because this is a
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  Speaker 4: off price retailer as opposed to Target, which has its
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  Speaker 4: own brands and doesn't claim to be off price.
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  Speaker 7: That's exactly right, Scarlett. Really, the big difference here also
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  Speaker 7: is on the execution side. TJX is known for executing seamlessly,
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  Speaker 7: so they also guide conservatively, and you expect them to
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  Speaker 7: beat every time, and they also surpass analyst estimates because
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  Speaker 7: analyst estimates are usually a tad above the guidance that
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  Speaker 7: the company provides. So, yeah, there was a lot of
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  Speaker 7: strength in the quarter, and I think both TJX and
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  Speaker 7: also Target benefited from higher tax refunds in the quarter.
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  Speaker 7: And it does appear that Target is improving their execution,
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  Speaker 7: but they're also cycling a three year stacked comp sales
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  Speaker 7: decline of seven point four percent, whereas TJX is cycling
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  Speaker 7: a three year stacked comp sales increase of over nine percent. Again,
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  Speaker 7: the difference in the execution and the appeal of off
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  Speaker 7: price and especially now that consumers are having to cope
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  Speaker 7: with higher gas prices, and then as earlier in your
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  Speaker 7: just recent broadcast there you were talking about how the
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  Speaker 7: implications for that are raising costs of some products, and also,
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  Speaker 7: you know, we could get freight right now, we're not
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  Speaker 7: seeing that because there's been some hedging in place. For
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  Speaker 7: example with Target, that was one of the benefits in
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  Speaker 7: their margin in the quarter was on the front side
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  Speaker 7: freight hedging.
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  Speaker 4: Mary, is there anything that TJX isn't doing well? You
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  Speaker 4: mentioned execution has been flawless, but that's kind of what
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  Speaker 4: investors expect from this company. What could it be doing better?
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  Speaker 4: Where is it perhaps leaving money on the table.
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  Speaker 7: Yeah, that's a good question, Scarlett. It seems I can't
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  Speaker 7: see where they're really leaving money on the table at
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  Speaker 7: this juncture. And if anything, what we continue to see
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  Speaker 7: every single quarter is the availability of excess merchandise. And
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  Speaker 7: this is across brands that spend you know, that span
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  Speaker 7: the appeal from consumers at the very low end to
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  Speaker 7: consumers at the very high end. So we're continuing to
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  Speaker 7: see a lot more luxury merchandise. It looked like in
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  Speaker 7: some of these shopping halls that we're posted there's a
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  Speaker 7: lot of product from Saline, Gucci, Ive Song Luran. I mean,
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  Speaker 7: it's amazing how much out there in luxury. And we're
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  Speaker 7: seeing that luxury is off right now and so now
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  Speaker 7: you can get it at discounted prices in the off
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  Speaker 7: price channel, at least with TJX and their runway model.
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  Speaker 2: What's the growth strategy for a company like TJX. Is
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  Speaker 2: it more stores, is it driving digital growth? Is it
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  Speaker 2: raising average selling price? What's kind of the growth story
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  Speaker 2: for a company like TGX.
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  Speaker 7: Yeah, so Paul, that's a good question for them. It's
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  Speaker 7: really continuing to expand, so that is opening up new stores,
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  Speaker 7: and they are opening up more newer stores this year.
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  Speaker 7: I think they have on target over one hundred. But
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  Speaker 7: they're also expanding internationally, which is why they have these
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  Speaker 7: joint ventures in the Middle East, and they just entered
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  Speaker 7: Spain this year, so that's a new market for them.
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  Speaker 7: And then of course they also have an investment in Mexico.
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  Speaker 7: So they're sticking with the off price channel but expanding
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  Speaker 7: around the globe. And part of the the reason why
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  Speaker 7: they're doing that is because they have seasoned executives that
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  Speaker 7: want to take on more responsibility and this is a
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  Speaker 7: way to do it. So they continue to see a
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  Speaker 7: long runway, not only in North America. For example, they're
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  Speaker 7: expecting to open somewhere around I think it's like seven
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  Speaker 7: thousand stores, so they still have about seventeen hundred and
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  Speaker 7: thirty eight to go, so they have a big runway still.
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  Speaker 7: Okay that and by the way, they keep moving that
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  Speaker 7: target right as they see more and more opportunities.
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  Speaker 2: Stay with us. More from Bloomberg Intelligence coming up after this.
• 10:44
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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  Speaker 1: weekdays at ten am Eastern on Apple, Cocklay and Android
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• 10:58
  Speaker 1: All right, boks.
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  Speaker 2: Our next segment is is sponsored by John Tucker and
• 11:01
  Speaker 2: All to Do with Yourself. People out there Drew reading
• 11:04
  Speaker 2: joints the here. Bloomberg Intelligence home building analyst Low's reported
• 11:08
  Speaker 2: some numbers there, Drew. Are all these crazy people that
• 11:12
  Speaker 2: actually do their work on their own homes? Are they
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  Speaker 2: still buying stuff?
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  Speaker 5: It was still largely in inline quarter for Lows zero
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  Speaker 5: point six percent comp on same store sales. They maintained
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  Speaker 5: their full year guidance calling for flat to two percent growth,
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  Speaker 5: which I think was encouraging. So underlying trends in the
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  Speaker 5: business are relatively stable, but I think that still reflect
• 11:38
  Speaker 5: a number of challenges out there, the most important being
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  Speaker 5: what we're seeing in the housing market. Turnover still we
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  Speaker 5: about twenty percent below normalized levels. We haven't seen that
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  Speaker 5: meaningful lift in spring demand that we were hoping for,
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  Speaker 5: and now we have rates back up to six and
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  Speaker 5: three quarters percent through on housing at least in the
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  Speaker 5: near term. At the same time, we've got consumer uncertainty,
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  Speaker 5: you know, whether people are concerned about the outlook for
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  Speaker 5: economic growth, the outlook for employment. Now we have these
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  Speaker 5: geopolitical tensions, so all these are kind of of weighing
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  Speaker 5: on that DIY consumer And where we're seeing it most
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  Speaker 5: importantly is in a pullback and spending in those bigger
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  Speaker 5: ticket discretionary categories.
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  Speaker 4: So for companies like Lows and Home Depot, they kind
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  Speaker 4: of have to wait out this cycle. They have to
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  Speaker 4: wait for things to improve, and that's that's a cyclical
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  Speaker 4: headwind that they really have no control over. Where they
• 12:31
  Speaker 4: do have control over is to create more productivity, create
• 12:34
  Speaker 4: more efficiencies. What is Low's doing on that front.
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  Speaker 5: Yeah, So you make a great point is they really
• 12:41
  Speaker 5: can't battle what's happening in the housing market. But what
• 12:43
  Speaker 5: they have been doing is investing for when the market
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  Speaker 5: eventually turns. And where we've seen it from both retailers
• 12:49
  Speaker 5: is really on the pro side. So Loads have done
• 12:52
  Speaker 5: has done a lot of investments, you know, in crafting
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  Speaker 5: kind of a portfolio of products that the pros really demand.
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  Speaker 5: They've worked hard on build holding out a loyalty program.
• 13:02
  Speaker 5: They've done two pretty significant acquisitions of LBM and ADG,
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  Speaker 5: which will give them exposure not only to kind of
• 13:09
  Speaker 5: the larger pro where there's somewhat of an untapped addressable
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  Speaker 5: market for both of those retailers, but it'll also give
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  Speaker 5: them exposure to the home building space, which is an
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  Speaker 5: area that they have historically had no exposure. Now, as
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  Speaker 5: we've discussed before, the new home market is under similar pressure.
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  Speaker 5: We're seeing housing starts actually contract, But as you mentioned,
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  Speaker 5: it's really about positioning themselves for the next leg of
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  Speaker 5: growth when the housing market and the consumer starts to
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  Speaker 5: come back.
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  Speaker 2: Existing home sales bumping along around four million per year,
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  Speaker 2: Where should that number be in a healthy market?
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  Speaker 5: Yeah, so we've been there for a couple of years.
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  Speaker 5: We're about twenty percent or so below normalized levels, so
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  Speaker 5: we should be, you know, somewhere around the five million mark.
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  Speaker 5: You know. I think the fact that we've been bumping
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  Speaker 5: along these legs with all of the different challenges that
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  Speaker 5: we've had, you know, from rates to economic uncertainty to
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  Speaker 5: gap political uncertainty, tells us that we're at a bottom.
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  Speaker 5: You know. We think that we can grow existing home
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  Speaker 5: sales low single digits in twenty twenty six as more
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  Speaker 5: inventory starts to come onto the market. That's likely to
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  Speaker 5: come at the expense of home prices, which you know,
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  Speaker 5: as we know, are up over fifty percent over the
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  Speaker 5: last several years. So you know, for the home improvement retailers,
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  Speaker 5: the headwind associated with the existing home market has started
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  Speaker 5: to fade, but it just hasn't emerged it as a
• 14:34
  Speaker 5: catalyst for growth.
• 14:36
  Speaker 2: Stay with us. More from Bloomberg Intelligence coming up after this.
• 14:43
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
• 14:47
  Speaker 1: weekdays at ten am Eastern on Apple, Cocklay and Android
• 14:50
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• 14:53
  Speaker 1: you get your podcasts, or watch us live on YouTube.
• 14:57
  Speaker 4: We are an AI obsessed market in every way, whether
• 15:02
  Speaker 4: it's talking about companies that are making some changes to
• 15:05
  Speaker 4: staffing because of spending due to AI, or awaiting in
• 15:09
  Speaker 4: videos results, or watching a legal case involving open AI
• 15:14
  Speaker 4: and Elon Musk. And it's really that one that I
• 15:16
  Speaker 4: want to pick up on because that's been going on
• 15:19
  Speaker 4: for a couple of weeks and it's really captured a
• 15:21
  Speaker 4: lot of people's attention. La sweeneers two billionaires joking it
• 15:24
  Speaker 4: now and it looks like Elon Musk lost, and he
• 15:27
  Speaker 4: says he's going to appeal. I want to get a
• 15:29
  Speaker 4: better understanding of what this lawsuit means and what it
• 15:33
  Speaker 4: allows for Matthew Schttenhelm is our media litigation analyst at
• 15:36
  Speaker 4: Bloomberg Intelligence. He is joining us right now from Washington,
• 15:39
  Speaker 4: d C. So is it as simple as Matthew Elon
• 15:43
  Speaker 4: Musk lost Sam Altman one? So now open ai can
• 15:45
  Speaker 4: go public.
• 15:48
  Speaker 6: I think that's the big takeaway from this. It's not
• 15:50
  Speaker 6: completely over yet. As you said, Elon Musk has vowed
• 15:54
  Speaker 6: to appeal this decision on Monday, but at this stage
• 16:00
  Speaker 6: things are looking much better for open Ai. This was
• 16:04
  Speaker 6: a pretty serious case that because it had advanced this far,
• 16:08
  Speaker 6: the judge had led it clear motion to dismiss a
• 16:12
  Speaker 6: motion for summary judgment, let it go all the way
• 16:14
  Speaker 6: to trial. And Musk was seeking pretty severe remedies against
• 16:20
  Speaker 6: open Ai, not just over one hundred billion dollars in
• 16:23
  Speaker 6: potential damages, but limits on the company's ability to seek
• 16:29
  Speaker 6: private investor returns. Musk wanted the company to be limited
• 16:34
  Speaker 6: to serve the good of the world first and foremost,
• 16:37
  Speaker 6: and effectively that would cap private investor returns. Doesn't really
• 16:41
  Speaker 6: work for an AI company. So Musk losing this with
• 16:45
  Speaker 6: this jury decision that the judge adopted on Monday is
• 16:49
  Speaker 6: a big step forward for Open Ai in avoiding this overhang.
• 16:53
  Speaker 2: Elon, Musk says he's going to appeal. I know you
• 16:57
  Speaker 2: have opinions on how successful appeals may be. What do
• 17:00
  Speaker 2: you think in this case?
• 17:01
  Speaker 6: Yeah, so I think it's going to be an uphill
• 17:03
  Speaker 6: battle for Musk. At this point, most appeals fail, and
• 17:08
  Speaker 6: here this appeal would go to the Ninth Circuit Court
• 17:10
  Speaker 6: of Appeals and Musk would be limited to arguing that
• 17:14
  Speaker 6: the jury and then the judge got it wrong on
• 17:17
  Speaker 6: the statute of limitations. The jury said Musk filed this
• 17:21
  Speaker 6: suit too late, and there's a three year statute of
• 17:23
  Speaker 6: limitations for breach of charitable trust claims. Typically, appeals courts
• 17:28
  Speaker 6: look at legal questions. Was the judge right on that
• 17:32
  Speaker 6: three year test? As being the controlling law Where appeals
• 17:36
  Speaker 6: courts have trouble and have limited ability to intervene is
• 17:40
  Speaker 6: factual questions, And here a jury took up the factual
• 17:44
  Speaker 6: questions of what did Musk know and when did he
• 17:47
  Speaker 6: know it? And getting into the nitty gritty of that,
• 17:51
  Speaker 6: their conclusion that he should have sued earlier because he
• 17:55
  Speaker 6: knew about any alleged wrongdoing earlier. That's going to be
• 17:59
  Speaker 6: a tough thing for or three appellate judges to to
• 18:02
  Speaker 6: second guests because they tend to deffer on factual questions.
• 18:05
  Speaker 6: So I would think Muskt is a pretty significant underdog
• 18:09
  Speaker 6: as this case goes to appeal.
• 18:11
  Speaker 4: So what did Elon Musk get out of this trial
• 18:13
  Speaker 4: this case?
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  Speaker 6: Well, I mean, anyway, he put a lot of pressure
• 18:20
  Speaker 6: on open AI. I think some have argued that that
• 18:24
  Speaker 6: Sam Altman, he had a very difficult cross examination, and
• 18:29
  Speaker 6: and maybe there were questions raised about his his truthfulness.
• 18:34
  Speaker 6: Some some may view and and some some may suggest
• 18:37
  Speaker 6: may maybe open AI isn't as pleasing a place for
• 18:41
  Speaker 6: investment going forward based on that leadership. I think this
• 18:44
  Speaker 6: was was certainly motivated, arguably by Musk's desire to compete
• 18:50
  Speaker 6: with this company since he's no longer tied to it.
• 18:53
  Speaker 6: And and you could you could argue that maybe this
• 18:56
  Speaker 6: you know passed some dirt at the company in a
• 18:58
  Speaker 6: way that that that you know may may have set
• 19:01
  Speaker 6: it back slightly, but I more likely than that. I
• 19:05
  Speaker 6: think Musk losing this case is the big takeaway I
• 19:08
  Speaker 6: think that's a big win for open ai, and unless
• 19:11
  Speaker 6: he can overturn that, I think open Ai moves ahead,
• 19:14
  Speaker 6: and I don't think Must gets all that much at
• 19:15
  Speaker 6: the end of the day.
• 19:17
  Speaker 2: So at the heart of this, though, was whether open
• 19:20
  Speaker 2: ai should be, I guess, a kind of for the
• 19:23
  Speaker 2: public trust or is it a profit making institution. Where
• 19:27
  Speaker 2: does that whole concept standout whole argument because again that
• 19:30
  Speaker 2: we may see I tried to go public here exactly.
• 19:34
  Speaker 6: So the argument was was a very unique one that
• 19:38
  Speaker 6: this was a breach of a charitable trust, that open
• 19:40
  Speaker 6: ai basically created a charitable trust when it started as
• 19:45
  Speaker 6: a nonprofit seeking to benefit the world, and Musk's claim
• 19:50
  Speaker 6: was that by moving to a for profit model that
• 19:55
  Speaker 6: breached that charitable trust and that open Ai couldn't move
• 19:59
  Speaker 6: ahead to you seek private investor returns because of how
• 20:03
  Speaker 6: it started up. What Musk never really had, though, was
• 20:06
  Speaker 6: any sort of written documentation. There's no trust agreement that
• 20:10
  Speaker 6: says that. What there was was sort of piece together
• 20:13
  Speaker 6: conversations and corporate filings and things like that to try
• 20:18
  Speaker 6: to make that argument. So it was never a real
• 20:21
  Speaker 6: air type case on Musk's part. And so what this
• 20:24
  Speaker 6: freeze OpenAI to do is to go ahead to have
• 20:27
  Speaker 6: a for profit component. It still has the charity, it
• 20:31
  Speaker 6: still has been not for profit, but it also has
• 20:34
  Speaker 6: a secondary piece, the for profit model, which fuels the
• 20:37
  Speaker 6: business brings in the money needed for an AI company
• 20:40
  Speaker 6: to work. And so now that business model can proceed
• 20:43
  Speaker 6: full speed ahead with this case out of the way.
• 20:47
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