Daily Brief: Target’s Strategic Thinking Proves Inflation Isn’t Unbeatable

Daily Brief: Target’s Strategic Thinking Proves Inflation Isn’t Unbeatable

almost 2 years ago3 mins

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Target reported better-than-expected quarterly earnings on Tuesday, as the US big-box retailer shows that it pays to plan three steps ahead.

What does this mean?

Target did all it could last quarter to mitigate the effect of supply shortages, buying $2 billion more in backroom stock than it normally would ahead of the holiday season. And that foresight paid off handsomely: customers made 8% more trips to Target’s stores and website last quarter than the same time in 2020, helping push overall profit up by a better-than-expected 12%. That growth’s arguably all the more impressive considering what the tail-end of 2020 looked like: the US was awash with cash after the government doled out stimulus checks to keep Americans afloat. Add in the fact that Target forecasted better-than-expected revenue growth for this year, and investors didn’t need much convincing: they sent the retailer’s shares up 13%.

Target stock
Source: The Wall Street Journal, FactSet

Why should I care?

The bigger picture: Spend money to make money.

Trouble is, Target’s costs are due for a growth spurt too. The company announced earlier this week that it’s upping hourly wages, in hopes of better competing for workers in a competitive labor market. In fact, it reckons it’ll spend $300 million more this year on salaries and healthcare benefits alone, which – on top of already high supply chain costs – could end up dragging on the retailer’s profit margins.

Zooming out: Inflation isn’t all that.

This is just another sign that the retail sector as a whole is in rude health. Walmart posted a robust set of earnings last month, and US department store Kohl’s – which is expecting the introduction of customer-favorite brands like Calvin Klein to help boost sales – gave a better-than-expected revenue outlook for the year on Tuesday. All these strong results suggest consumer demand is actually holding up pretty well – all the more surprising considering how fast prices are rising right now.

US inflation

Zoom Reported Slowing Growth

Zoom image

Zoom announced a bleak outlook for 2022 on Tuesday, just as demand for acceptable office attire boomed among the teleconferencing company’s customers.

What does this mean?

Office workers might’ve gotten used to only showing their torsos on a 3x3 inch video chat window, but that changed last quarter when the Great Office Return began in earnest. This is the moment Zoom’s been dreading, and with good reason: the number of business customers with 10-plus employees fell last quarter from the one before. And since big business customers are a key driver of revenue, that could be why Zoom’s total sales came in just 21% higher last quarter than the same time the previous year – a huge drop from the previous quarter’s 35%. The company topped it all off with a weaker-than-expected revenue outlook for both this quarter and 2022 as a whole, and its shares cratered 13%.

Zoom stock
Source: Google Finance

Why should I care?

For markets: If in doubt, bribery.

Investors have been worried about Zoom’s future for a while now, making the case – clearly a pretty accurate one – that growth would slow dramatically when offices started opening up again. That might be why its stock price has now fallen over 75% from its peak in October 2020. Still, Zoom is trying to put their minds at ease: the company announced plans to buy back $1 billion worth of its own shares, which will reduce the supply of those in circulation and should increase the price of those left over.

The bigger picture: Zoom’s branching out.

Zoom had planned to offset some of this slowdown in growth by buying customer support software provider Five9 last year, but the deal fell through. So now it’s going it alone, launching its own rival platform last week. That could be a wise move: the so-called “global contact center software” market is predicted to be worth $150 billion by 2030 – up from $24 billion last year.

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