Shopping carts in front of a Target store in the borough of Queens in New York, the United States, on Saturday, May 13, 2023. Target Corp. is expected to release earnings numbers on May 17th.
Bing Guan | Bloomberg | Getty Images
Goal on Wednesday beat Wall Street’s earnings expectations even as the discount store’s sales barely grew year over year and its buyers bought more necessities.
Shares of the company closed the day at $160.96, up nearly 3%, though Target said its sales remain sluggish in the current quarter. Comparable sales are expected to decline in the low single digits.
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The major retailer maintained its full-year outlook. Comparable revenue for the fiscal year is expected to range between a low single digit decrease and a low single digit increase. Target said full-year earnings per share will be between $7.75 and $8.75.
Even as customers buy fewer essential items, Target lures them into stores with groceries, essentials and trend items, CEO Brian Cornell said in a call with reporters.
Here’s what Target reported for the three-month period ended April 29, compared to Refinitiv’s consensus estimates:
- Earnings per share: $2.05 versus $1.76 expected
- Revenue: $25.32 billion versus $25.29 billion
Target’s net income fell in the fiscal first quarter $950 million, or $2.05 per share, versus $1.01 billion, or $2.16 per share, last year.
Total revenue rose nearly 1% from $25.17 billion a year earlier, just ahead of analysts’ expectations.
Comparable sales, a key retail metric that tracks sales in stores open 13 months or more and online, were roughly flat in the first quarter compared to the year-ago period. That was roughly in line with Wall Street’s expectations of 0.2% growth, Street Account estimates.
Buyers spent less during the quarter, Chief Growth Officer Christina Hennington said in a conversation with investors. Sales were strongest in February, weakened in March and continued to decline towards the end of April, she said.
Beauty was the strongest category, with mid-teens sales growth year-over-year. Food and Beverage grew in the high single digits. And sales of household items rose in the low-single digits as customers bought health and pet supplies.
Other categories that include more discretionary items, including apparel and home furnishings, saw sales decline in the mid-single-digit to low double-digit range, Hennington said. She added that when customers actually buy these items, they usually only buy them at the last minute, like just before a vacation.
Because customers bought different items, they shopped differently. Comparable store sales increased 0.7%, but comparable digital sales declined 3.4% compared to the same period last year.
Cornell said a drop in packages being shipped to homes is partly the reason for weaker digital sales. These deliveries have a focus on necessities, compared to Target’s same-day curbside pickups, which tend to include more mundane items like groceries or diapers. he said.
In Target stores and online, shopper traffic grew about 1%, on top of a 3.9% growth in the year-ago period.
Target has had a challenging year of falling profits and slowing demand after a growth spurt during the Covid pandemic. Annual sales increased about $31 billion — or nearly 40% — from the fiscal year ended January 2020 to the fiscal year ended January of this year.
The discounter’s problems intensified in the year-ago quarter as it faced higher freight costs and popular pandemic purchases like bikes and kitchen items were left on the shelves. The retailer’s stock fell as it missed Wall Street’s earnings expectations for three straight quarters.
After Target canceled orders and reduced the warehouse flooding, another storm cloud appeared: buyers had become more economical.
Target showed signs on Wednesday that its inventories and earnings are getting back on track. Fiscal first quarter earnings beat expectations and gross margin of 26.3% increased year over year as freight costs fell and the retailer received fewer discounts.
Still, operating margin still hasn’t returned to pre-pandemic levels. However, this will only happen in the next fiscal year or later, the company announced in February.
Inventory at the end of the quarter was down 16% year over year, driven by a 25% decline in discretionary merchandise categories. The company ordered more groceries and high-traffic items to better reflect customers’ shift in spending.
Other retailers have also noticed a change in shoppers’ purchases. On Tuesday, home depot missed sales expectations and lowered guidance. The company’s CFO, Richard McPhail, said customers are buying less expensive items and instead dedicating themselves to smaller projects. Also, he added, they are again spending money on services and have already bought many things they needed while stuck at home due to Covid concerns.
Target’s Cornell identified another challenge facing retailers: organized retail theft. He said Target expects attrition from these crimes to increase by $500 million compared to last year. Shrinkage also includes other types of inventory loss, including employee theft and damaged goods.
“The unfortunate fact is that violent incidents are increasing in our stores and across retail,” he said on the phone call to reporters.
He added the trend Detracts from the shopping experience as the shelves are half full for customers and staff are anxious.
While Target reported a better-than-expected quarter on Wednesday, executives stressed that the strain on U.S. budgets will pose challenges for the company in the near term.
“The consumer is under pressure,” Hennington said on the call to reporters. “Persistent inflation, lack of savings, and economic uncertainty in general are affecting their decisions and making trade-offs.”
However, she said Target gets them to open their wallets by offering holiday-themed items, new products and lower prices. Sales of groceries, decorations and gifts for Valentine’s Day and Easter, movie-themed toys and fresh collections of women’s clothing saw an upswing.