Target tops estimates; expects $500 million hit in annual profit due to theft
Target Corp.’s first-quarter earnings and sales were better than expected even as consumers focused on necessities over discretionary items and shopped more in-store than online.
The discounter reaffirmed its full-year outlook as it noted that it expects sales to remain sluggish in its current quarter. Looking ahead, CEO Brian Cornell said Target expects shrink will reduce its profitability this year by more than $500 million compared with last year.
“While there are many potential sources of inventory shrink, theft and organized retail crime are increasingly important drivers of the issue,” stated Cornell. “We are making significant investments in strategies to prevent this from happening in our stores and protect our guests and our team.”
On a call with reporters, Cornell said “the unfortunate fact is violent incidents are increasing at our stores and across the entire retail industry. And when products are stolen, simply put they are no longer available for guests who depend on them.”
“As we work to address this problem, the safety of our guests and our team members will always be our primary concern,” he said. “Beyond safety concerns, worsening shrink rates are putting significant pressure on our financial results.”
Later, on the company's earnings call, Cornell said Target is working to reduce theft by installing protective fixtures and adjusting product assortment in some locations.
Target’s net income fell to $950 million, or $2.05 a share, for the quarter ended April 29, from $1.01 billion, or $2.16 a share, in the year-ago period. Adjusted earnings per share fell to $2.05 from $2.19, but easily topped analysts’ estimates of $1.77.
Total revenue edged up 0.6% to $25.32 billion, above estimates of $25.26 billion, with sales growth of 0.5%. Traffic rose 0.9%.
Total comparable sales were flat to last year. Same-store sales grew 0.7%, also better than expected.
Comparable digital sales declined by 3.4%. Same-day services saw mid-single digit growth, led by high-single digit growth in drive-up. Target said strength in beauty, food & beverage and household essentials offset continued softness in discretionary categories.
During the quarter, the retailer opened six of the 20 new stores it plans to open in 2023. It also began work on more than half of the approximate 175 stores scheduled to undergo full remodels and other enhancements this year.
“We came into the year clear-eyed about the challenges consumers are facing, and we were determined to build on the trust we've established with our guests,” said Cornell. “It's required agility and the ability to flex across our multi-category portfolio as we lean into value and the product categories our guests need most right now. Thanks to the team's dedication, we saw an increase in guest traffic in Q1, with total sales increasing and profitability ahead of expectations.”
Inventory was down 16% year at the end of the quarter compared to the same period last year, driven by a 25% reduction in discretionary merchandise categories.
Cost of sales declined 0.4% to $18.39 billion, as gross margin improved to 27.4% from 26.7%.
Target said that “based on softening sales trends in the first quarter,” it is planning for a wide range of sales outcomes in the second quarter, centered around a low-single digit decline in comparable sales. Adjusted EPS is expected to be $1.30 to $1.70, below expectations of $1.95.
The retailer reaffirmed its full-year guidance for same-store sales growth of 0.7% and for adjusted earnings per share of $7.75 to $8.75.
“We are maintaining our full-year financial guidance, based on the expected benefit from efficiency and cost-savings efforts and our team's continued focus on agility, flexibility and retail fundamentals in the face of continued challenges including inventory shrink,” Cornell said. “At the same time, we will continue making long-term investments in our stores, supply chain and our team, positioning Target for profitable growth and market-share gains in the years ahead."