Earnings

Target slashes full-year earnings forecast as retailer struggles to win over thrifty shoppers

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A Target department store on May 17, 2023 in North Miami Beach, Florida. 
Joe Raedle | Getty Images

Target on Wednesday missed quarterly sales expectations and slashed its full-year forecast, as it again had trouble convincing shoppers to buy more than the necessities.

The big-box retailer cut both its full-year sales and profit expectations. Target offered a gloomier outlook even as some top economists have scrapped calls for a recession and federal data show signs inflation is cooling.

The company said it now expects comparable sales to decline by about mid single-digits for the full fiscal year and earnings per share to range from $7 to $8. It previously anticipated comparable sales would range from a low single-digit decline to a low single-digit increase, and earnings per share would come in between $7.75 and $8.75.

Target’s struggling shares surged in premarket trading despite the soft forecast, as its quarterly earnings topped expectations.

CEO Brian Cornell said Target’s sales and store traffic improved in July. Yet he said the company is wary about trends in the second half of the year including rising interest rates, the return of student loan payments this fall and still elevated prices of everyday items.

“As we look at the consumer landscape today, we recognize the consumer is still challenged by the levels of inflation that they’re seeing in food and beverage and household essentials,” he said on a call with reporters. “So that’s absorbing a much bigger portion of their budget.”

Here’s what Target reported for the three-month period that ended July 29, compared with Refinitiv consensus estimates:

  • Earnings per share: $1.80 vs. $1.39 expected
  • Revenue: $24.77 billion vs. $25.16 billion expected

Stock slides as sales sag

Target, which saw enormous sales gains during the Covid pandemic, has tried to bounce back from about a year of disappointing results. Excess inventory and higher levels of markdowns hit profits last year. Its merchandise mix, which includes many fun and impulse-driven items, has become a liability as consumers focus on needs rather than wants and put discretionary dollars toward vacations and concerts.

Groceries account for only about 20% of Target’s annual revenue compared with more than half of Walmart’s annual revenue.

Target’s struggles to win over shoppers in the face of inflation have dragged down the company’s stock. As of Tuesday’s close, its shares had fallen 16% this year, even as the S&P 500 had risen by 15%. Its stock price touched a 52-week low of $124.96 on Tuesday, nearly cut in half from its pandemic highs.

Target’s challenges continued in the most recent three-month period. Total revenue fell about 5% from $26.04 billion a year ago.

Comparable sales, a key metric that tracks sales online and at stores open at least 13 months, declined 5.4%. That’s a sharper decline than the 3.7% drop that analysts expected, according to consensus estimates from StreetAccount. 

For stores, comparable sales declined 4.3%. Digital comparable sales dropped 10.5%

Sales softened in the second half of May and into June before recovering in July, Cornell said. He said the Fourth of July and Target Circle Week, its competing sale during Amazon Prime Day, helped lift results.

Chief Financial Officer Michael Fiddelke said on the call with reporters that it is hard to quantify which factors most contributed to Target’s slower sales. Among them, customers continued to buy less clothing, home decor and other nonessential items while paying more for food, energy and rent. The company’s sales tailed off compared with a year-ago period when sharp markdowns helped clear through a glut of inventory and drove purchases. 

And Target faced backlash in late May over its collection of merchandise celebrating Pride month, including some items it later pulled after threats to employees. The decision to remove certain items sparked more criticism. 

Cornell said “negative reaction” to Target’s Pride collection had a material impact on sales. But he defended the company’s response and said after Target removed some items in June out of concern for employee and customer safety, it “saw things normalize.” He said it will continue to have a collection for Pride month and other heritage months.

Clawing back to higher profits

Even as sales lagged, 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. That beat analysts’ expectations.

In the year-ago quarter, the retailer’s quarterly profit had plummeted by 90% as it coped with a glut of unsold items. It took aggressive steps to cancel orders, mark down prices and clear inventory as customers bought fewer popular pandemic categories and became more frugal because of inflation.

Fiddelke emphasized Target’s success in turning around some of those trends.

“We had talked about this year being a really important year in terms of building back the profitability of the business, and for the team to take a big step forward in the second quarter in spite of softer-than-expected sales is really great progress on that journey,” he said.

Along with company-specific actions, the discounter said it also benefited from lower markdowns, cheaper freight costs, reduced supply chain and online fulfillment expenses and increased retail prices. But it said higher shrink, in part due to organized retail crime, hurt profits.

Inventory at the end of the quarter fell 17% compared with the year-ago period. Target said that lower inventory also reflects a 25% year over year drop in discretionary categories.

Over the past year, Target has shaken up its product mix to lean into high-frequency categories like groceries and household essentials. The company said growth in those areas helped offset declines in discretionary categories during the fiscal second quarter.

Target’s Chief Growth Officer Christina Hennington said some items are still persuading customers to open up their wallets, such as brightly colored Stanley tumblers, Barbie-themed merchandise and a Taylor Swift vinyl exclusive to the retailer.

Beauty is also driving revenue. Sales at Ulta Beauty at Target, mini shops inside of its stores, more than doubled compared with a year ago, she said. Sales of other beauty items rose by double digits. And snacks, candy and beverages fueled growth in Target’s food and beverage category.

As Target tries to buoy sales for the rest of the year, she said the retailer is focused on offering affordable prices, stocking up on frequently purchased items and capitalizing on major seasons like back-to-school.

“We’re gonna play the long game,” she said on the call with reporters. “We don’t carry our assortment for a moment in time, but we’re going to lean into the kinds of things that have made Target Target.”

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