Budget-conscious Target shoppers were reluctant this spring to go through with purchases outside what they immediately needed.
Reluctant consumers have caused sales at Target Corp. to flatten for the first time after six years of sales growth, even as the Minneapolis retailer continues to see more shoppers walk through its doors and visit its website.
Target’s first quarter earnings report Wednesday indicated even popular retailers with strong customer-drawing power can only do so much to appeal to a consumer who is in fear of a looming recession or in need of a scale-back on non-essential buys in favor of necessities like groceries.
This week, leaders at Home Depot also indicated consumers are foregoing large home improvement projects and delaying the purchase of expensive items like grills and appliances. Walmart will also likely report a softening in demand for discretionary products when it reports its earnings Thursday.
Despite the slowdown, Target still beat Wall Street’s expectations in terms of profitability. Target netting $950 million, or $2.05 a diluted share, from February through April, better than the $1.76 analysts expected. Target’s profits dipped 6%, which while still a decline, was a shallower fall than the more than 50% drop that triggered a stock market scare this time last year. Target generated total revenue of $25.3 billion for the quarter.
“We came into 2023 clear-eyed about what consumers were facing with persistent inflation and rising interest rates,” said Target CEO Brian Cornell during a media call. “We were determined to build on our guests’ trust by unifying as one team to deliver affordable joy each and every day.”
Target shares were up 2% in mid-day trading.
On Wednesday, Target reported its first-quarter comparable sales, including its sales from existing stores and online, didn’t change compared to the same time last year with digital sales decreasing for the second quarter in a row.
Similar to the last few quarters for the Minneapolis-based giant, Target customers shifted their spending away from discretionary categories like home goods that were popular during the pandemic to everyday categories like beauty, groceries and household essentials. While inflation has begun to cool off, it still has stayed a major factor in customers’ buying habits and pushed many to try to cut back their spending.
“This is a consistent story we’ve been sharing for a while,” said Christina Hennington, Target’s chief growth officer. “The consumer is under pressure. 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 trade-offs.”
It’s a story that’s playing out across the retail industry. Core retail sales — those not including car, gas and restaurant sales — increased 2% last month compared to the same time the year before, showing that while consumers are still spending, they aren’t buying products anywhere near the rate they did during the pandemic.
Much of what Target is experiencing now is a normalization after record sales growth it saw during the pandemic. Target has had more than 20 quarters of back-to-back comparable sales growth going back to mid-2017.
Last year, overstocked inventory hurt Target’s profits. Target has been able to improve its inventory position after canceling some orders and providing discounts to sell some merchandise last year. Inventory at the end of the first quarter was 16 percent lower than last year.
One issue that has continued to cut into Target’s profits is inventory shrink with theft and organized retail crime increasingly driving the problem. Target executives said they expected shrink this year to reduce the company’s profitability by more than $500 million compared with last year.
“The unfortunate fact is violent incidents are increasing at our stores and across the entire retail industry,” Cornell said.
After a challenging year, Target has become more conservative with its sales outlooks. Its leaders predict in the second quarter, comparable sales will experience a low-single-digit decline with full-year sales continuing to decline or perhaps achieve a low-single-digit increase.
While Target faces many hurdles this year, the first-quarter report also showed room for opportunity. When adding the benefit of sales from new locations to comparable sales, Target sales actually grew narrowly by 0.5%. Target opened six new stores so far this year with 20 in total planned for 2023. Store and online traffic also continued to grow with traffic in total rising 0.9% in the first quarter.
Target is continuing to add to its same-day fulfillment services widely used during the pandemic. By next month, customers will be able to bring back returns at nearly all of Target’s stores without leaving their cars using Target’s drive-up service. Target said there was more than a 5% in growth this past quarter in customers’ use of same-day services like order pick-up and delivery through Shipt.
Target could also benefit from some of its competitors having financial issues. Bed Bath & Beyond filed for bankruptcy last month and has started to wind down its operations at its stores as well as sister chain Buy Buy Baby. Target has continued to grow its private label offerings in home goods and baby supplies and apparel. Earlier this month, baby stroller and carrier brand Colugo announced it was expanding its products to more than 400 Target stores nationwide.
