Target/consumer stocks

Target downgraded earnings for the second time in barely a month, citing consumer demand shifts (the sorts of things they are buying).

The distinction matters because it isn’t so much a slow down in consumer demand generally, but part of the ongoing shift back towards services, from goods, and hence not some macro harbinger of near term recession.

Here’s Supercheap’s inventories.

And Breville’s.

Even Wesfarmers.

Harvey Norman too.

City Chic.

Notice that I am swapping between inventories and inventories to sales. It does matter.

Suppose the sales stay high (consumer demand is permanently altered towards goods), then there is no problem for some of these names. If the sales normalise (towards services, or just other goods that aren’t coffee machines or pizzas), then you do have a problem.

Since taking a view on the sales can mask the problem, you should look at both.

The worst combination is where both inventories and the inventory to sales ratio have meaningfully increased, and the slowdown/consumer pattern shift occurs.

If you combine that with a high starting valuation for the stock (earnings multiple), the results can be deadly.

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