Consumers have been spending more in the past year, but overall sales are down. It’s inflation that’s causing the total rise, at least for the moment.
Retailers are having to deal with two conflicting issues. Supply chain disruptions are leading to genuine shortages. And consumers cutting back on spending due to inflation is leading to an inventory excess in other areas.
“Cheap chic” retailer Target (TGT) sounded this unusual warning. The company cut its earnings guidance on Tuesday, leading to shares dropping at the start of the day. However, an excess of inventory could likely lead to slower rises in prices, or even declines in some goods. Both would help take the sting out of inflation’s bite.
Action to take: Target shares have lost a third of their value in the past year. That’s taken shares from 24 times earnings to 11 times forward earnings. That makes it an attractive player for a rebound in inflation-adjusted consumer spending down the line. Shares have also seen their yield pushed up to about 2.3 percent here.
For traders, shares have essentially stopped declining in the past few weeks, so may be setting up for a short-term move higher from here. The September $165 calls, last going for about $8.30, could deliver mid-to-high double-digit gains on such a rally.
Disclosure: The author of this article has no position in the company mentioned here, but may further trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.