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

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

The big-box retailer cut both its full-year sales and profit expectations. Target’s gloomier forecast comes as top economists abandon calls for recession, and data from the government shows that inflation is slowing. 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 rose 3% Wednesday despite the soft forecast, as its fiscal second-quarter earnings topped expectations and inventory levels improved. Investors also have had low expectations for the company, reflected in a sharp drop in its share price this year heading into Wednesday.

CEO Brian Cornell said Target’s sales and store traffic improved in July. He said that the company was still cautious about the trends for the second half of this year, including the rise in interest rates, student loan repayments in the fall, and the high prices of everyday products. This is a bigger part 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

  • Sales slide after Covid bump
  • Target’s struggles to win over shoppers in the face of inflation have dragged down the company’s stock. By Tuesday’s closing, Target shares had dropped 16% in the past year, despite an increase of 15% for the S&P500. 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 dropped 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%. StreetAccount’s consensus estimates show that this is a steeper decline than the analysts had expected of 3.7%.

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 holiday 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. Customers continued to purchase less clothing, home décor, and other non-essential items, while spending more on food, energy, and rent. Sales at the company have declined compared to

the previous period, when sharp markdowns were used to clear out excess inventory and drive purchases. Target also faced criticism in late May for its Pride Month merchandise collection, which included some items that were later removed after threats against employees. This decision sparked further criticism.

Cornell stated that “negative reactions” to Target’s Pride Collection had a significant impact on sales. He defended Target’s response, saying that after Target removed certain items in June for employee and consumer safety concerns, “things normalized.” 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 net income for the fiscal second quarter rose from $183m, or 39c per share, to $835m, or $1.80. That beat analysts’ expectations.

In the year-ago quarter, the retailer’s quarterly profit had plummeted by nearly 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. She said that sales at Ulta beauty at Target mini-shops inside Target stores have more than doubled in comparison to a year earlier. Other beauty products also saw double-digit growth. 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. She told reporters that they would be playing the long game. “