US Retailer Target Corp forecasted a surprise drop in holiday-quarter sales, blaming rising inflation and “dramatic changes” in consumer spending for a drop in demand for everything from toys to electronics.

Shares of the big-box retailer fell more than 17% in early trading after the company revealed that an early start to holiday season promotions, as well as shoppers holding out for deeper discounts, cut its third-quarter profit in half.

Target announced a cost-cutting plan to save $2 billion to $3 billion over three years, but declined to provide specifics. However, it stated that mass layoffs or a hiring freeze are not in its current plans.

“Clearly it’s an environment where consumers have been stressed,” Target Chief Executive Officer Brian Cornell said.

Target has been hit the hardest by a drop in consumer spending because its product mix is more geared toward discretionary items like clothing, home furnishings, and electronics, prompting it to discount heavily to clear excess inventory.

Despite the discounts and the easing of the inflation rate in October, Target executives said consumers were rapidly abandoning discretionary purchases in favor of household necessities.

“It was a precipitous decline (in discretionary demand), and frankly, we’ve seen those trends in the early part of November as well,” said Christina Hennington, Target’s chief growth officer. Target halved its fourth-quarter operating margin rate forecast to about 3%, due to expectations of bigger holiday discounts across categories, as well as a rising amount of theft and organized crime in its stores.

Target anticipates that fourth-quarter comparable sales will fall by a low single-digit percentage. According to Refinitiv IBES data, analysts expected a 3.1% increase.

“Target makes their money in discretionary spending, so the difficulty in the environment hits harder,” said Bill Smead, chief investment officer of Smead Capital Management, which owns Target shares worth nearly $209 million.

Walmart, which devotes more than half of its shelf space to groceries and other daily necessities, raised its full-year sales and profit forecast on Tuesday, but warned that customers’ spending on general merchandise categories may slow during the holiday season.

(Adapted from TheGlobeAndMail.com)

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