Target (TGT) same store sales came in very light for December – up just 0.9% - and some on the Street were surprised. They should not have been. The world - and US consumers - have changed, permanently.
Target caters to three kinds of customers:
- Low income customers aspiring for something a bit better than Wal-Mart (WMT) or Dollar General (DG). In Q4, many of these people lost their unemployment insurance, did not get a job or lost their job, and could not move up the retail food chain. They were frugal by absolute necessity.
- Middle income customers stretching a buck on many items and satisfied with Target quality and selection. In Q4, these customers did not spend as much on cheap sweaters and skirts and picture frames and bought an iPad, a Ralph Lauren polo at Filene’s or a Coach (COH) bag at an outlet mall. One high quality, name brand gift.
- Upper income customers who are mindful of their buck. They continued to shop at Target.
This shift is seen in industrywide data. Alongside the Target sales announcement was data from other companies. The same store sales numbers of a high end store – Macys (M) – were up 3.8%. The Limited (LTD) saw sales grow 5%. Sales at the low end – Costco (COST) – were up 6%. Credit card transaction data confirms a shift to higher quality, more expensive items -- more revenue is clearing through the credit card companis but not more transactions. Also, the impact of Apple products is not properly factored into Street forecasts for many store chains. According to Durban Capital, through October of 2010, more than 60% of the growth on consumer spending in the US was on Apple products. Assuming this trend continued – and throw in Kindle sales – and there was not a lot of money to go around this holiday season for inexpensive clothes and doo dads at Target.
Bottom line: The New Frugal is a tradable trend, one of my seven trading theses for 2011, a permanent shift in consumer spending habits that is hollowing out middle tier retailers and brands such as Target. The problem in December was not a one-off and middle tier retailers will struggle in 2011.
