Target (TGT) earnings Q1 2023

Target on Wednesday topped Wall Street’s earnings expectations, even as the discounter’s sales barely grew year-over-year and its shoppers bought more necessities.

Shares were choppy in premarket trading as investors processed the report and the company’s second-quarter guidance. Target said it expects sales to remain sluggish in the current quarter, marked by a single digit decrease in comparable sales.

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

Even as customers buy fewer discretionary items, Target is drawing them to stores with groceries, everyday essentials and on-trend items, CEO Brian Cornell said on a call with reporters. 

Here’s what Target reported for the three-month period that ended April 29, compared with Refinitiv consensus estimates:

• Earnings per share: $2.05 vs. $1.76 expected
• Revenue: $25.32 billion vs. $25.29 billion

Target’s net income in the quarter dropped to $950 million, or $2.05 per share, from $1.01 billion, or $2.16 per share, a year earlier.  

Total revenue rose nearly 1% from $25.17 billion a year ago, coming in just above analysts’ expectations. 

Comparable sales, a key retail metric that tracks sales at stores open at least 13 months and online, were about flat in the first quarter compared with the year-ago period. That was about in line with Wall Street’s expectations of 0.2% growth, according to Street Account estimates.

As customers bought different items, they shopped differently, too. Comparable store sales grew 0.7%, but comparable digital sales declined by 3.4% versus the year-ago period.

Cornell said a decrease in packages shipped to homes in part drove the weaker digital sales. Those deliveries skew toward discretionary items, compared with Target’s same-day curbside pickup orders, which tend to include more everyday needs like food or diapers, he said.

At Target’s stores and online, shopper traffic grew roughly 1%, on top of 3.9% growth in the year-ago period.

Target has had a challenging year of squeezed profits and softening demand, after a surge of growth during the pandemic. Its annual revenue jumped by about $31 billion – or nearly 40% – from the fiscal year that ended in Jan. 2020 to the fiscal year that ended this January.

In the year-ago quarter, the discounter’s troubles gained steam as it coped with higher freight costs and popular pandemic purchases like bicycles and kitchenware lingered on shelves. The retailer’s stock fell, as it missed Wall Street’s earnings expectations three quarters in a row.

After Target canceled orders and cleared through the inventory glut, another storm cloud appeared: Shoppers had become more frugal.

Target on Wednesday showed signs of getting its inventory and profits back on track. Its fiscal first-quarter earnings beat expectations and its gross margin rate of 26.3% rose from a year ago, as freight costs fell and the retailer had fewer markdowns.

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

Inventory dropped 16% year-over-year at the end of the quarter, driven by a 25% reduction in discretionary merchandise categories. The company has been ordering more food and high-frequency items to better mirror customers’ spending shift.

Other retailers have noticed a change in shoppers’ purchases, too. On Tuesday, Home Depot missed revenue expectations and lowered its forecast. The company’s CFO Richard McPhail said customers are buying fewer big-ticket items and taking on smaller projects. Plus, he added, they are spending again on services and already bought many items they needed when stuck at home due to Covid concerns. 

Target’s Cornell called out another challenge for retailers: Organized retail theft. He said Target expects shrink will reduce the retailer’s profitability by more than half a billion dollars compared with last year. 

 “The unfortunate fact is violent incidents are increasing at our stores and across the entire retail industry,” he said on the call with reporters. 

He added the trend hurts the shopping experience by leaving shelves half-full for customers and employees rattled.

While Target reported a better-than-expected quarter Wednesday, executives stressed that strain on U.S. households will leave it facing challenges for the near future.

“The consumer is under pressure,” Chief Growth Officer Christina Hennington said on a call with reporters. “The consistent inflation, the running out of savings as well as just economic uncertainty in general is having an impact on their choices and they’re making tradeoffs.”

Yet she said Target is getting them to open their wallets by dangling holiday-themed items, new products and lower prices. It’s gotten a pop in sales from food, decor and gifts during Valentine’s Day and Easter, from movie-themed toys and fresh collections of women’s dresses.