Dive Brief:
- Target on Wednesday reported flat sales for the first quarter, with growth of 0.5%. Comp store sales grew 0.7% but were offset by a decline in comparable digital sales, which were down 3.4%. In digital sales, Target's drive-up service saw high single-digit growth, while same-day services saw mid-single-digit growth.
- Overall, the retailer reported $25.3 billion in total revenue for the quarter ending April 29, a 0.6% rise from a year ago. Operating income for Q1 was $1.3 billion, down 1.4% from last year. The retailer’s Q1 gross margin rate rose to 26.3% from 25.7% a year ago.
- Target said strength in its beauty, food and beverage and household essential categories offset softness in discretionary purchases. The retailer also said shrink could cut this year’s profitability by more than $500 million compared with last year.
Dive Insight:
Target’s Q1 guest traffic rose nearly 1% on top of 3.9% a year ago, helping to push profitability ahead of expectations, despite ongoing challenges for retail in the current macroeconomic environment.
“In many ways, the environment today feels completely different than three years ago when the pandemic was just beginning and no one knew what to expect,” CFO Michael Fiddelke said during an earnings call. “But today, even as the pandemic feels further and further behind us, we continue to face elevated macro uncertainty and volatility as the world continues to transition toward a new normal.”
Target is “a pandemic-era winner,” Zak Stambor, a senior analyst with Insider Intelligence said in comments emailed to Retail Dive. Stambor noted the retailer’s annual revenue rose nearly 40% from 2019 to 2022 due to a convenience-focused strategy that offered multiple ways to fulfill online orders through delivery, curbside or in-store.
But, Stambor added, “Target now faces difficult year-over-year comps at a time when consumers are pulling back on discretionary purchases. Consumer spending has shifted away from the very types of discretionary purchases that fueled Target’s impressive pandemic-era gains such as on-trend apparel, home goods and consumer electronics. Instead, shoppers are buying necessities, which in the case of Target means groceries, beauty, and household essentials.”
Neil Saunders, managing director of GlobalData, echoed that sentiment.
“Unfortunately, the current consumer economy just isn’t conducive to this kind of behavior. The carefree shopping trip has been replaced by more focused missions where people set budgets and are less willing to deviate from them.”
CEO Brian Cornell confirmed during an earnings call that spending in discretionary categories remains down, while consumers have increased their spending in beauty, food and beverage and household essentials. “But a short-term pullback in discretionary purchases doesn't mean we'll turn away from our apparel, home and hardline categories. Instead, we'll continue to invest in them and deliver fresh new items throughout the year,” Cornell said.
“The good news is that while people are generally spending a bit less at Target, the company has modestly increased its share of shoppers,” Saunders said. “More people are coming into Target stores or onto its website, attracted by the company’s good value for money position and because they like to browse. This should leave the business in a good position once consumer demand starts to swing back – however, it will take time before this materializes and before Target gets fully back on track.”
However, Fiddelke said that operations generated $1.3 billion of cash in Q1 versus a year ago “when our operations absorbed $1.4 billion. This dramatic year-over-year improvement was driven almost entirely by changes in our inventory investment compared with last year,” Fiddelke said.
Fiddelke also told investors and analysts on the earnings call that Target spent $1.6 billion on capital investments in Q1 to open new stores, remodel existing stores, build upstream inventory replenishment capacity and ramp up its sortation center strategy. For the full year, Fiddelke said Target expects its capital expenditures to be in the $4 billion to $5 billion range. Target has almost 2,000 stores and listed more than 40 upcoming new locations on its website on Wednesday.
Based on the first quarter’s soft sales trends, Target said it’s “planning for a wide range of sales outcomes in the second quarter, centered around a low-single-digit decline in comparable sales.” For the full year, the company is maintaining its prior guidance, which includes expected comp sales to range from a low-single-digit decline to a low-single-digit increase and operating income growth of more than $1 billion.
Looking ahead, the retailer also warned that the company's profitability could be impacted by over half a billion dollars compared to last year due to shrink. Target pointed to theft and organized retail crime as drivers and said it is making "significant investments" in stores for its prevention.
"We're also focused on managing the financial impact on our business so we can continue to keep our stores open," the company said.
Editor's note: This story was updated to clarify that Target expects shrink to cost it $500 million more from its 2023 profits than last year.
