What happened
Shares of Amazon.com (NASDAQ: AMZN) declined on Wednesday after rival retailer Target (NYSE: TGT) reported a steep decline in profits. By the close of trading, Amazon's stock price was down 1.8% after falling as much as 3.4% earlier in the day.
So what
Target was forced to issue heavy discounts to clear out excess inventory. That weighed heavily on the discount retail chain's profitability. Its gross and operating margins fell to 24.7% and 3.9%, respectively, in the third quarter, from 28% and 7.8% in the prior-year period. Target's earnings per share (EPS), in turn, plunged 49% year over year to $1.54.
The retailer's guidance was even more alarming to investors. Target now projects "a low-low-single digit decline" in same-store sales. Management also expects the company's operating margin to decline further, to 3%.
"In the latter weeks of the quarter, sales and profit trends softened meaningfully, with guests' shopping behavior increasingly impacted by inflation, rising interest rates, and economic uncertainty," CEO Brian Cornell said in a press release.
Worse still, chief financial officer Michael Fiddelke said during a conference call with analysts that the downturn could persist into 2023.
"As we look beyond the holiday season, we're planning for a continued challenging environment as we move into next year," Fiddelke said.
Now what
Target's troubles are also worrisome for Amazon's shareholders. A further decline in consumer discretionary spending could dent the e-commerce titan's sales and profits, which are already under pressure from inflation concerns and recession fears.
Amazon's actions suggest it is bracing for such a scenario. The company is slashing costs in its massive fulfillment network and scaling back on unprofitable projects as it works to bolster its sagging profitability.
