Target On Wednesday, it missed quarterly sales expectations and cut its full-year forecast as it again struggled to persuade buyers to buy more than needed.
The big-box retailer cut both its full-year sales and profit expectations. Although some senior economists dismissed calls for a recession and government data showed inflation cooling, Target offered a more gloomy outlook.
The company said it now expects comparable sales to decline in the mid-single digits for the full fiscal year and earnings per share to range between $7 and $8. Previously expected comparable sales are expected to range from a low-single-digit decline to a low-single-digit increase, and earnings per share are expected to be between $7.75 and $8.75.
Struggling shares of Target rose 3% on Wednesday despite a soft forecast as second-quarter earnings beat expectations and inventory levels improved. Investors also had low expectations for the company, which was reflected in the sharp drop in share prices heading into Wednesday this year.
CEO Brian Cornell said in July that Target’s sales and store traffic were improving. However, the company said it was wary of trends in the second half of the year, including rising interest rates, student loan repayments due this fall and everyday items still becoming more expensive.
“As we look at the consumer landscape today, we recognize that the consumer is still facing the same levels of inflation that they’re seeing in food and beverages and household items,” he told reporters in a call. “So it eats up a bigger chunk of their budget.”
Here’s what Target reported compared to Refinitiv consensus estimates for the three-month period ended July 29:
- Earnings per share: $1.80 vs. $1.39 expected
- Revenue: $24.77 billion, expected to be $25.16 billion
Sales slide after Covid hit
Target’s struggles to capture shoppers in the face of inflation have dragged down the company’s stock. As of Tuesday’s close, the S&P 500 is up 15%, but its shares are down 16% this year. Its shares hit a 52-week low of $124.96 on Tuesday, nearly halving from their pandemic peak.
The target’s problems continued in the most recent three-month period. Total revenue was down about 5% from $26.04 billion a year earlier.
Comparable sales, a key indicator that tracks sales online and at stores open at least 13 months, fell 5.4%. That’s a steeper decline than the 3.7% decline analysts were expecting, according to StreetAccount’s consensus estimate.
Comparable store sales were down 4.3%. Digital comparable sales were down 10.5%
Cornell said sales softened through June before rebounding in the second half of May and July. He said the Fourth of July holiday and the competing Target Week during Amazon Prime Day helped boost results.
Chief Financial Officer Michael Fiddelke told reporters that it’s hard to say which factors had the biggest impact on Target’s slower sales. Among them, customers continued to pay more for food, energy and rent while buying less clothing, home decor and other non-essential items. compared to the company’s sales decreased period a year ago, when steep discounts helped clear excess inventory and boosted purchases.
And Target faced backlash at the end of May for its collection of products celebrating Pride month, including some items it later pulled after threats were made against employees. The decision to remove certain items drew more criticism.
Cornell said the “negative reaction” to Target’s Pride collection had a significant impact on sales. But he defended the company’s response, saying Target had “seen things go back to normal” in June after it removed some items out of concern for employee and customer safety. He said the collection will continue for Pride month and other heritage months.
Return to higher profits
Even as sales slumped, the retailer’s profits rebounded. Target’s fiscal second-quarter net income rose to $835 million, or $1.80 per share, from $183 million, or 39 cents per share, a year earlier. It beat analysts’ expectations.
In the previous quarter, the retailer’s quarterly profit fell nearly 90% as it struggled with a backlog of unsold merchandise. It took aggressive steps to cancel orders, mark down prices and clear inventory as customers bought less popular pandemic categories and became more frugal due to inflation.
Fiddelke highlighted Target’s success in reversing some of these trends.
“We’ve talked about this year being a really important year in terms of growing the profitability of the business, and for the team to take a big step forward despite softer-than-expected sales in the second quarter is a really big step forward on that trip,” he said.
In addition to company-specific measures, the discounter said it also benefits from lower prices, cheaper freight costs, reduced supply chain and online fulfillment costs, and lower retail prices. But he said higher shrinkage hurt profits, partly due to organized retail crime.
At the end of the quarter, inventory decreased by 17% compared to the previous period. Lower inventory also reflects a 25% year-over-year decline in discretionary categories, Target said.
Over the past year, Target has shaken up its product mix to lean toward high-frequency categories like groceries and household necessities. The company said growth in these areas helped offset declines in discretionary categories in the fiscal second quarter.
Christina Hennington, Target’s chief growth officer, said some items still convince customers to open their wallets, such as brightly colored Stanley tumblers, Barbie-themed merchandise and retailer-owned Taylor Swift vinyl.
Beauty also brings income. At Ulta Beauty at Target, it said sales in mini-stores in its stores more than doubled from a year ago. Sales of other beauty products grew by double digits. Snacks, sweets and beverages, meanwhile, drove growth in Target’s food and beverage category.
As Target tries to boost sales for the rest of the year, the retailer said focuses on offering affordable prices, stocking frequently purchased items, and capitalizing on key seasons like back-to-school.
“We’re going to play the long game,” he told reporters on a call. “We’re not carrying our range for a moment, but we’re going to address what Target does.”