By Jacob Wolinsky. Originally published at ValueWalk.
Following is the unofficial transcript of a CNBC exclusive interview with Target Corporation (NYSE:TGT) Chairman & CEO Brian Cornell on CNBC’s “Squawk Box” (M-F, 6AM-9AM ET) today, Wednesday, May 18th. Following is a link to video on CNBC.com:
Target CEO Brian Cornell On Earnings: We Are Seeing A Shift In Consumer Spending
BECKY QUICK: As Andrew mentioned, Target missing the mark as costs rise for the retailer, the company reporting an adjusted $2.19 a share compared to the $3.07 the street was expecting. First quarter comps were up by 3.3%. That was much better than expected and traffic was up by 4%. Joining us right now is Target CEO Brian Cornell and Brian this has obviously been a pretty difficult quarter. What happened?
BRIAN CORNELL: Well, first of all, Becky, I appreciate being here during a difficult report. But it’s a chance to talk about kind of our business and where things stand and I frame it by really looking at kind of the front of the house of our business and then the back of the house and if I think about the front of the house, the consumer against facing component and, you know, we saw really strong comps over 3% on top of 23% last year and importantly it was driven by traffic. Traffic up 4% on top of 17% last year, guests are shopping our stores, they’re enjoying our services, they’re using drive up. But clearly the challenge for us in this quarter was that the back of the house. From a freight and transportation standpoint, things have changed significantly from even 13 weeks ago. We did not project I did not project the kind of significant increases we would see in freight and transportation costs and you’ve been talking about it on CNBC almost every day. I think yet again this morning you talked about all-time record fuel and diesel costs. Right now we project that’s going to hit us about a billion dollars of incremental costs in this fiscal year. So a significant increase that we didn’t anticipate. The other change is in our category mix. While our comps grew by 3.3% pretty balanced between digital and stores, we added another billion dollars in incremental growth in the quarter. The mix of the categories looked very different than we expected. We saw great strength in food and beverage and household essentials. Our beauty business grew by double digits. But we started to see some softening in some of the discretionary categories, including those big bulky categories, TVs, kitchen appliances, bikes, as a consumer started to shop differently. I’ll come back and talk about what we’re seeing from a trend standpoint that certainly impacted our mix and our margin mix. But it’s also added complexity in our supply chain. Those big bulky items are now in our supply chain not moving at the rate we expected. We had inventory that we would have liked to have last year that arrived late and we pulled certain inventories up early to make sure we’re ready for the back to school and back to college season. So that’s added additional complexity and cost in our supply chain. And we did not anticipate that kind of change as we were sitting here 13 weeks ago. So we own it, but freight transportation, a change in mix and then the increased complexity in supply chain have added obviously pressure to our operating income.
QUICK: If those things were not anticipated 13 weeks ago, what are you seeing now for the month of May? Is the consumer rolling over at all, are any of these situations improving how do you get your arms around it?
CORNELL: Becky thinking about the consumer right now, one we’ve seen May off to a very strong start. American families celebrated Mother’s Day, we saw record sales and fresh flowers and plants and things like champagne and gifting. Mom was recognized. And I really want to go back to some of those trend changes we’ve seen. It’s a shopping change in how they’re spending their dollars, but we’re still seeing strong traffic and we’re still seeing growth. A year ago, during the pandemic, we were buying lots of TVs for our homes as many Americans were really the last two years have been working and educating their families from home. Well, they’re shifting from buying TVs to buying luggage and our luggage business was up over 50%. They’re traveling again.
JOE KERNEN: They were buying TVs when there was something to watch on Netflix Brian. Unfortunately, Netflix has its own problem because there’s nothing that’s not that’s not your fault. Could you have and I’m wondering when you’re thinking about profitability versus maintaining market share, could you have raised prices, what would have happened if you raised prices to soften that the margin hit that you were taking because of all the increased expenses? Would you have, did you feel at the time if you raised prices that you would have lost customers they would have they would have resisted there, I mean, it must be very difficult to set prices. And then the other thing is you when you hear all the rhetoric out of Washington, was that in the back of your mind when they blame all the inflation on greedy US corporations is that in the back of your mind, I can’t raise prices to maintain my own margins because of this?
CORNELL: Joe, it’s been in the back of my mind is one taking care of those guests and those families that depend on us for value and affordability each and every day and certainly during a time of inflation that’s more important than ever, and taking care of our teams. So we’ve been really focused on making sure we surgically and selectively pass on some costs where we can, but we’ve got to make sure right now we provide value for that consumer who is again still shopping in our stores and still using our site. So it’s a balance.
KERNEN: But you won’t do it this quarter either. You won’t get, you won’t get prices more in line with your costs this quarter either. Just the—
CORNELL: We’re still going to have some of the same challenges in the second quarter. We certainly expect those to moderate over the balance of the year as we rebalance our inventories and look at opportunities to improve efficiency. But we’re going to continue to stay focused on protecting the consumer and those guests who shop our stores, provide them great value because they are still shopping our stores and we’re seeing great resilience with the consumer. You know, I talked about TVs being exchanged for luggage, you know, those small appliances that were in everyone’s shopping basket over the last couple of years, those are being replaced by consumers are shopping for more toys because Becky right now, they’re going to birthday parties for the first time in a couple of years. So they’re still spending it’s a consumer who comes to Target to shop all of our categories, but we’re seeing a shift in what they shop and how they’re shopping right now.
QUICK: The change in consumer trends is that a bigger problem from the perspective that it’s lower margin items that they’re buying, or is it more an issue of just trying to keep up with these changing shifts and make sure you have the right stuff in store and you wind up with excess inventory because you’re still buying stuff that they were buying, you know, four months ago?
CORNELL: It’s a combination of both. Obviously, there’s a mix shifts as we see food and beverage accelerate or household essentials, and a decline in some of those discretionary categories like TVs and appliances. But we’re also sitting here today recognizing we’ve got big, bulky inventory. You know, TVs take up a lot of space in our warehouses, small appliances, bikes that are not selling the way they did. So we’ve had some supply chain challenges we’ve got to work through. But I also want to make sure it’s really clear, even in categories like toys, in small appliances, in bikes, our sales are actually ahead this quarter, versus where they were in 2019 pre-pandemic. So it’s not like consumers are not buying TVs, they’re not buying small appliances, they’re not buying bikes for their kids, it’s just comparing it versus the pandemic surge that we saw in those categories that were so important to the consumer during the pandemic. They’re still shopping but they started to spend dollars differently.
QUICK: I mean, that’s a big question. And one of the things people are looking through your results, Walmart‘s results, Home Depot and Lowe’s results is to try and find out what is happening with the consumer. We hear all the time that a recession could be coming. You would probably be one of the very first to see it if it started to impact the consumer. Have you seen anything on that sign now? Walmart talked yesterday about how some shoppers were trading down from national brands, premium brands to house brands. Have you seen that?
CORNELL: Becky, in the first quarter we didn’t see that. Obviously we saw very strong traffic and strong comps across our entire business and May is off to a really solid start. Good traffic, strong comps. I talked about Mother’s Day. I would expect Memorial Day to be a big holiday season. So as I sit here today, I’m not seeing any sign of a consumer slowdown. I can’t project out six months from now. But just what we’re seeing today and what we saw in the first quarter, it’s still a consumer who is out shopping and enjoying getting back to normal life.
KERNEN: You have a lot of stakeholders we hear about, you know, that’s the buzzword in recent years. Your stakeholders are shareholders. So shareholders probably rightly would – you know you had 46 points today – but would rightly say, maybe you need to think about profitability, in addition to taking care of your customers with those low prices. And the reason I’m returning to this is because if you do decide to raise prices to maintain not full profitability, but get back closer to where you were, then we need to factor that into everybody doing it and what the PPI or what the CPI looks like, over the next three months for Jay Powell and company. How much did you raise prices last quarter overall?
CORNELL: Our prices at retail increase less than our costs, but we did take some price increases.
KERNEN: How much?
CORNELL: But to be really clear, we’re always focused on balancing what’s right for the consumer and our guest, what’s right for our team, and what’s right for our shareholders.
KERNEN: Would you raise it more next quarter?
CORNELL: Well, we’re going to certainly do everything we can to find greater efficiency and improve our overall profitability and there’s things we have to do behind the house. So in our guidance, we said expect the second quarter to look a lot like the first quarter within marginal improvement in the back half of the year. And then we’re committed to our long term algorithm of getting back to mid-single digit top line growth, mid-single digit operating income growth, and then high single digit EPS. We’ll continue to spend capital in our business to make sure we’re positioned for long term success. But we always balance what’s right for the guests and our consumer, what’s right to take care of our team and then what’s right for our shareholders. I’ve seen Joe, I’m going on my ninth year in this job. We’ve had to invest before in taking care of the guests, taking care of our team. It always pays back over time.
KERNEN: Do you feel confident that the Fed and Jay Powell can orchestrate a soft landing and actually get inflation under control? Because it obviously makes a big difference for your business.
CORNELL: Joe, I’ll leave that to other people to opine on. What we’ve had to be prepared for is just to be agile and adjust to a changing consumer and economic environment. So we have a business model that performs well in a number of different environments. We’ll have to make sure we’re agile and flex based on consumer needs and trends. So would I pull from a soft landing? Absolutely. And I hope everything, you know, Chairman Powell is doing really works well over the balance of the year and in 2023 but we’ve had to be agile and make sure we can adjust to any economic environment.
KERNEN: Do you think that any type of foreshadowing – should you have told, or indicated through body language that things were not going to be up to speed? Should – but Walmart same question. You can’t answer for Walmart. But three months from now could the street be surprised or would you maybe indicate mid-quarter that things aren’t proceeding as planned?
CORNELL: Joe, I’ll sit here today. 13 weeks ago, we had a very different outlook for the year and I’ll take complete accountability for the fact we didn’t project properly. The rising cost of transportation and freight, we didn’t call the billion dollars back then. Things move pretty rapidly. We didn’t expect the next shift. We’re certainly looking at consumers getting back to normal and some changes in lifestyle and impact of stimulus. We didn’t expect to see this kind of mix shift. And we certainly didn’t project the impact on our supply chain. So we own that, I own that. We’re working to turn that around. We’re confident we will. We’ve had a very durable business model. We have a great team and capabilities. But I’ll take full accountability for the fact that we missed some of these factors. And that’s on us to improve over time. Starting with the second quarter and the back half of the year but certainly as we go into 2023
QUICK: Brian, I want to thank you for coming on. You’ve come on good day as you’ve come on on tough days. We do appreciate your explaining this. Last quick question. I’ll ask you if it were things like freight costs that were going up how far out can you see – measure something like that? Is that something you see for six weeks out for something you can see for a couple of months?
CORNELL: Well, I think we all saw this change really quickly. And again, we were sitting here 13 weeks ago – it was the early days of the Russia/Ukraine war and things move very quickly. And I hope we’ll see some modification over time. But you know, it’s very hard for us at times to project all of these different variables, and we do our very best, but we’ve got to stay close to the consumer. Stay close to our team. Do the right things for our business over time. And I’ve seen time and time again, when we take care of the guests and take care of consumers. When we take care of our team, our shareholders are rewarded.
KERNEN: Would you ever weigh in on whether we should spend any more money fiscally – should we? We spent quite a bit. Do you think that had something to do with what we’re dealing with now and should we maybe take a step back and try and look back a year from now about whether we do build back whatever it’s called?
CORNELL: Joe, I spend a lot of time looking back but right now we have to look forward and really think about what we do next and navigate through this landscape.
KERNEN: Ok. I gave it a shot. Anyway. Thanks.
QUICK: Brian, I just want to thank you again for coming on, even when times are tough for answering all these questions.
CORNELL: Thanks for having me.
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