February 21, 2024

Target beat Wall Street’s earnings estimates on Wednesday, even as the discounter posted little year-over-year sales growth. Its shoppers bought more necessities.

Shares of the company rose nearly 4%, even as Target said it expected sales to remain subdued in the current quarter. It expects a low-single-digit decline in comparable sales.

The big retailer stuck to its full-year outlook. It expects comparable sales to range from a low-single-digit decline to low-single-digit growth for the fiscal year. Target said its full-year earnings per share will be between $7.75 and $8.75.

Target Chief Executive Brian Cornell said on a call with reporters that even as customers are buying fewer discretionary items, Target is still drawing them to stores that sell groceries, everyday essentials and trendy items.

Here’s what Target reported for the three-month period ended April 29, compared to a Refinitiv consensus estimate:

  • EPS: $2.05 vs. $1.76 expected
  • Revenue: $25.32 billion vs. $25.29 billion

Target’s fiscal first-quarter net income fell to $950 million, or $2.05 per share, compared to $1.01 billion, or $2.16 per share, a year earlier.

Total revenue rose nearly 1 percent from $25.17 billion a year ago, slightly ahead of analysts’ expectations.

Comparable sales, a key retail metric that tracks sales at stores and online stores open at least 13 months, were roughly flat in the first quarter compared with a year earlier. That was roughly in line with Wall Street’s 0.2 percent growth forecast, according to Street Account estimates.

Shoppers are spending less as the quarter progresses, chief growth officer Christina Hennington said on a conference call with investors. Sales were strongest in February, weakened in March and weakened further towards the end of April, she said.

Beauty was the strongest category, with sales up in the mid-teens year-over-year. Food and beverages grew in the high single digits. Household staples sales rose in the low single digits as shoppers bought health and pet supplies.

Other categories of more discretionary items, including apparel and home, saw sales declines in the mid-single digits to low double digits, Hennington said. When customers do buy these items, they tend to do so at the last minute, such as before the holidays, she added.

When customers buy different items, they shop differently. Comparable store sales rose 0.7%, but comparable digital sales fell 3.4% year-over-year.

Cornell said the weakness in digital sales was partly driven by a decline in home-delivery packages. These deliveries are skewed towards discretionary items compared to Target’s same-day curbside pickup orders, which tend to include more everyday needs like food or diapers, He said.

In Target’s stores and online, shopper traffic rose about 1 percent after a 3.9 percent increase in the year-ago period.

Target has had a challenging year with margins squeezed and demand weak after a growth spurt during the Covid pandemic. Its annual revenue rose by about $31 billion, or nearly 40%, from the fiscal year that ended in January 2020 to the fiscal year that ended in January this year.

During a year-ago period, the discounter was in growing trouble as it grapples with higher shipping rates and popular pandemic purchases like bikes and kitchenware lingering on its shelves. Shares of the retailer fell as it missed Wall Street earnings expectations for three straight quarters.

After Target canceled orders and cleared excess inventory, another dark cloud loomed: Shoppers became more frugal.

Target showed signs on Wednesday that its inventory and profits are back on track. Its fiscal first-quarter earnings beat expectations, with a gross margin of 26.3%, up from a year earlier, thanks to lower shipping costs and fewer markdowns from the retailer.

However, its operating margin has still not recovered to pre-pandemic levels. That won’t happen until the next fiscal year or later, the company said in February.

Inventory ended the quarter down 16% year-over-year, driven by a 25% drop in the discretionary category. The company has been ordering more food and high-frequency items to better reflect customers’ shifts in spending.

Other retailers have also noticed a change in shoppers’ buying behavior. Tuesday, The Home Depot It missed revenue expectations and lowered its forecast. The company’s chief financial officer, Richard McPhail, said customers were buying fewer big-ticket items and starting smaller projects. Plus, he added, they’ve spent money on services again and have bought a lot of items they’ll need while stuck at home due to COVID-19.

Target’s Cornell addressed another challenge retailers face: organized retail theft. Target expects the shrinkage to shave more than $1 billion off the retailer’s profitability compared with last year, he said.

“Unfortunately, violence in our stores and across the retail industry is increasing,” he said on a call with reporters.

he added the trend Half-full shelves that scare customers and employees alike impair the shopping experience.

Although Target reported better-than-expected quarterly results on Wednesday, executives emphasized that the pressure on American households will make it challenging in the near future.

“Consumers are under pressure,” Hennington said on a call with reporters. “Ongoing inflation, depleting savings and general economic uncertainty are affecting their choices and they are making trade-offs.”

But she said Target is wooing them to open their wallets by dangling holiday-themed merchandise, new products and lower prices. Sales of food, decorations and gifts, movie-themed toys and a new women’s clothing line are booming during Valentine’s Day and Easter.