Target Q2 profit jumps but sales fall as consumers pull back; cuts guidance
Target Corp. reported better-than-expected second-quarter earnings but its sales fell short as consumers continue to pull back on nonessential spending.
The discounter also faced a backlash by some customers in May over its Pride Month merchandise collection. On a call with investors, Target CEO Brian Cornell said the “negative’ reaction to the Pride collection had a material impact on sales, which softened in late May and into June but recovered in July. The retailer defended its response to the controversy, which included removing Pride items from some locations. Many store employees, Cornell said, faced a “negative guest reaction” to the Pride merchandise.
"To protect the team in the face of these threatening circumstances, we quickly made changes, including the removal of items that were the center of the most significant confrontational behavior,” Cornell said. “Pride is one of many heritage moments that are important to our guests and our team, and we’ll continue to support these moments in the future.”
During the call, Cornell once again discussed the problem of retail theft and organized retail and said that during the first five months of 2023, Target stores had a 120% increase in theft involving violence or threats of violence.
"Shrink remains consistent with our expectations but well above the sustainable level where we expect to operate over time, and unfortunately, safety incidents associated with theft are moving in the wrong direction," he told investors.
Cornell said that high prices for food and other household essentials are taking a bigger chunk out of customers’ paycheck. Also, customers are more focused on spending on experiences.
The retailer posted net income of $835 million, or $1.80 a share, for the quarter ended July 29, up from $183 million, or $0.39 a share, in the year-ago period. Adjusted per-share earnings also were $1.80, easily topping the $1.43 per share analysts had expected.
Revenue decreased 4.9% to $24.773 billion from $26.037 billion, missing estimates of $25.178 billion.
Comparable sales fell 5.4%, with comp sales down 4.4% and digital sales down 10.5%. Target said that continued growth in its “frequency” businesses (essentials, beauty and food & beverage) partially offset declines in discretionary categories. Beauty in particular was strong, with double-digit growth. Sales from Ulta Beauty at Target stores more than doubled year over year.
Inventory at the end of the quarter fell 17% compared with the year-earlier period. The lower inventory also reflects a 25% year over year drop in discretionary categories, the company said.
"Our second quarter financial results clearly demonstrate the agility of our team and the resilience of our business model, as we saw better-than-expected profitability in the face of softer-than-expected sales,” stated Cornell in the earnings release. “With the benefit of a much-leaner inventory position than a year ago, the team was able to quickly respond to rapidly-changing top-line trends throughout the second quarter, while continuing to focus on the guest experience."
Target lowered its full-year sales guidance to reflect recent softer sales trends and said it now expects comparable sales in a wide range around a mid-single digit decline for the remainder of the year. It expects adjusted earnings per share of $7.00 to $8.00, compared with its prior range of $7.75 to $8.75.
“We continue to take a cautious approach to planning our business, and have therefore adjusted our financial guidance in anticipation of continued near-term challenges on the topline,” Cornell states. “This approach, along with the long-term investments we're making in our business and strategy, position us to deliver sustainable, profitable growth in the years ahead."