Target Earnings Beat Street But Company Calls Out Cautious Consumer

Minneapolis’s darling Target
TGT
appears to be in recovery mode based on today’s first quarter reporting. While headwinds remain, particularly among slowing discretionary sales, and the cataclysmic bite that shrink has taken from the bottom line, Target was able to beat Wall Street expectations.

For the three-months that ended on April 29, revenue came in at $25.3 billion slightly ahead of the $25.18 billion estimate while adjusted earnings per share came in at $2.05 verses the estimate of $1.77 per share. The operating margin rate of 5.2 percent was ahead of expectations, reflecting a higher gross margin rate compared with last year.

Traffic Uptick

Other positive signs included a slight uptick in traffic of 0.9 percent on top of 3.9 percent in Q1 2022. This ratified recent reports by traffic counters by Placer.ai. that recently compared January through April footfall between Walmart
WMT
, Costco, and Target. Their data revealed Walmart traffic fell an average of 6.1 percent each month, including an 8.8 percent decline last month alone. Traffic at Costco also dropped an average of 6 percent each month during the same period. Target, however, saw traffic gains in January of 3.9 percent and 1 percent in February while breaking about even in March. The retailer did suffer a 6.3 percent traffic decline in April though.

Walmart is slated to report quarterly results before Thursday’s open, with analysts surveyed by FactSet expecting, on average, adjusted earnings per share of $1.32, and revenue of $148.94 billion, with Walmart U.S. same-store sales growth of 5.2 percent. This runs counter to the Placer.ai projections, so stay tuned.

More Happy Returns

Target’s quarterly reporting pretty much ratified the Placer.ai data. Overall, for the period comparable stores’ sales grew 0.7 percent, offset by a decline in comparable digital sales. However, in that category same-day services saw mid-single digit growth, led by high-single digit growth in Drive-Up.

As has been reported, Target is investing heavily in streamlining the returns process which dents profitability. By the end of this summer, shoppers across the country can drop off returns from their vehicles.

Target chief operating officer John Mulligan recently told investors “Our focus is giving our guests the flexibility, ease and convenience to shop the way that works best for them and scaling capabilities across every facet of our business,” Target expects curbside returns will lift customer loyalty and sales. Data backs this up: Eight in 10 consumers give priority to retailers that offer easy returns, Chain Store Age reports.

Softness in Softlines

Not unexpectantly, given the constraints being put on shoppers’ budgets, Softline sales continued to underperform, while Beauty, Household Essentials, and Food and Beverage compensated for softness in discretionary categories. CEO Brian Cornell noted “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.”

He also addressed the pilfering elephant in the room by stating “We now expect shrink will reduce this year’s profitability 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.” He went on to state “We are making significant investments in strategies to prevent this from happening in our stores and protect our guests and our team.”

Guidance Reflected Confidence

While softening sales trends are expected to continue throughout the second quarter, with earnings per share expectations to range between $1.30 and $1.70, CEO Cornell is staying optimistic the second half of the year will begin to normalize. “I think the combination of the traffic we’re seeing, the relationship we built with guests, the flexibility that the actions we took on inventory provides us in the back half of the year, and that great combination of new on trend merchandise and the consistent trends we’re seeing in food and beverage, household essentials, and beauty gives us a lot of confidence that we can navigate through a challenging consumer environment.”

That confidence has led to Target’s maintaining its prior full year guidance, which gave an early lift to the stock ticker, up nearly three percent just before noon Eastern time. Target 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 earnings per share will range between $7.75 and $8.75.