Caleb Silver, Editor-in-Chief at Investopedia, joined Closing Bell to break down what Target's lowered forecast means for the retail industry ahead of Friday's CPI report.

Closing Bell

Target Slashes Outlook, Says It Needs to Offload Inventory

Welcome back to cheddar news is closing bell, everyone christian Schoeller down here on the floor of the stock exchange and let's talk about Target because it is saying its profits in the short term will be significantly less than expected as the big box retailer tries to unnoticed surplus of inventory. This of course, as decades high inflation and shifting consumer habits drive down demand. Well, as a result, the company will be discounting more items and canceling orders with its suppliers and it does come just a few weeks after Target reported worse than expected quarterly profit sending shockwaves throughout the retail industry. So joining me now is Caleb silver editor in chief and investopedia. Caleb always good to see you. And what are your big takeaways from this move by target? Well, this is what we call the Bullwhip effect and it's always good to be with you Christy. The Bullwhip effect is when retailers don't have what customers actually want they have over ordered in some areas and under ordered in other areas. And I don't think target the gap walmart Abercrombie and Fitch you name it. Have really anticipated the switch and consumer demand because now these companies, especially the big box retailers are stuck with over inventories of lawn furniture, of big box electronics, of the higher marginal items. A lot of luxury apparel. A lot of sweat suits, leisure wear when consumers are spending more on gas, food and some basics and they're looking for the back to school stuff to the seasonal stuff. So they're over ordered. They have an excess of 43% inventory from last year, About $15 billion target. But you're seeing it all the way down through the retail chain. A lot of retailers were not ready for this. So it is interesting. Other retailers like Walmart, for instance, Caleb clearly moving on this news and certainly it was what we saw a few weeks ago was that yes walmart first disappointed actually. Then the next day target disappointed as well. But not every retailer was made the same. Some of these discount dollar tree dollar general stores did well. The affluent customers still spending at department stores like Nordstrom and Macy's for instance, do you think this is more confined to the big box retailer or something that is more pervasive across the retail space? I think you're feeling it across the retail space. Look at discretionary spending, you gotta keep an eye on that discretionary stocks have been absolutely destroyed. A lot of those high end things are discretionary. Elon musk is warning about, you know, an economic disaster coming our way because that's the discretionary purchase. But so are the electronics makers too. But you're right, there is this sort of uh a tale of two cities where you have the high end retailers doing pretty well right now, the low end doing well and now you're gonna start to see the oversupply retailers start to outperform the ali's of the world. The TJX, the Burlington's, they're able to sell that excess inventory at super low prices to clear it out. They make pretty good margins there because they get it cheap, Sell it and they also sell it pretty cheap. So you're seeing this bifurcation in the industry and that's kind of a big deal. When you look at where the money is, the money is in the big box retailers, the Walmarts of the world, the targets of the world. Also, they're critical to the supply chain. Those to target and Walmart are the biggest users of container ships in the world, interesting. Okay, so for consumers that want to find a good deal, maybe they should start shopping at target. And I think at the end of June July four, that's a big sales holiday every year anyway. If you are in the market for goods. I am curious though, Caleb amid this warning profit Warning from Target, what might that indicate about the May consumer price index data that we're gonna get on friday. And I know investors keenly watching that particular data point. Yeah, we'll get that and we'll get consumer sentiment. Consumer sentiment is going to tell you what it's been telling us for the past several months. It's at a 10 or more year low because consumers are pretty sanguine about the future of the economy right now. They're concerned about rising interest rates, inflation, you name it. So there's a lot of concern on the sentiment side on the consumer price index, I don't you know, we may have peaked but because repeat kristen doesn't mean we're coming right down the hill. I think consumer prices are going to remain elevated and consumer expectations for inflation are at about 5.3% over the next 12 months and then they cool a little bit to between three and 4%. So inflation is going to come down, it's not gonna come racing down the hill like everybody wants it to Caleb. I know you've been a student of the stock market and the economy for many years now. And the big question is whether or not we will actually see a recession in this country. What's your take knowing that the evidence is starting to mount up the yes growth is slowing. Yeah. I don't know. I think the more we talk about it the more we sort of bring it into existence. So I'm careful there. But I do think there's a very very good chance that the question is is this gonna be a long prolonged multi year recession, a downtrend or you know six months to 12 months recession, maybe 18 months at the average of a recession usually in that in that category. And if so will come out of it a little bit stronger because the economy is still growing in a lot of areas, the labor market is still pretty strong and I know prices are high, consumers are feeling that inflation but spending is hanging in there, spending hangs in I think we'll be okay. But that's the multi trillion dollar question right now. So target clearing out inventory to make way for back to school season. Can a strong back to school season Caleb basically offset some of the recent weakness that we've seen A big box retailer. It depends how long it is and how steeply they have to discount to clear out a lot of their items, retailers face this choice life, oh or FIFA last in, first out on the inventory or 1st and 1st out on the inventory. This is the time of year, believe it or not where they're already ordering for the seasonal stuff for the end of the year. So they got to clear out inventory now they can do that and not lose too much money. I think they're going to be okay because they should have a strong back to school season absent a real hiccup in the economy right now. All right, Caleb, Silver editor in chief at investopedia Caleb. Thank you as always.