TARGET COMPANY

Target $TGT beat Wall Street's earnings expectations on Wednesday, even though the discount retailer's sales barely rose year-over-year and its customers bought more daily necessities.

The company's shares were volatile in premarket trading as investors digested the company's second-quarter report and outlook. Target said that it expects to continue to see low single-digit comparable sales declines in the current quarter.

The big-box retailer stuck to its full-year outlook. It expects comparable sales to range from low single-digit declines to low single-digit increases in the fiscal year. Target said its full-year earnings per share will be between $7.75 and $8.75.

Even as shoppers are buying fewer discreet items, Target is luring them into grocery, daily necessities and fashion stores, Chief Executive Brian Cornell said in a call with reporters.

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

Target's fiscal first-quarter net income fell 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, just above analysts' expectations.

Comparable sales, a key retail metric that tracks sales at stores open at least 13 months and online, were roughly unchanged in the first quarter from a year earlier. That was roughly in line with Wall Street expectations, which Street Account had expected growth of 0.2%.

Customers spent less during the quarter, Christina Hennington, chief growth officer, said in a call with investors. Sales were strongest in February, weakened in March and softened further toward the end of April, she said.

Cosmetics was the strongest category, with sales up in the mid-teens percent year over year. Food and beverages grew at a single-digit pace. And sales in the housewares category grew by low single digits as shoppers bought health and pet items.

Other categories that include more discrete items, including apparel and home, saw sales declines that ranged from mid-single digits to low double digits, Hennington said. She added that when customers did purchase these items, they tended to get them at the last minute, such as right before the holidays.

Because customers were buying different items, they were also shopping differently. Comparable store sales were up 0.7%, but comparable digital sales were down 3.4% from the previous year.

Cornell said the weaker digital sales were partly due to a decline in the number of packages being sent to homes. Those shipments focus on discreet items compared to Target's orders, which are delivered on curbside pickup day and typically contain more everyday items such as groceries or diapers, she said.

At Target stores and online, the number of customers increased about 1%, up 3.9% from a year earlier.

After strong growth during the Covid pandemic, Target has had a challenging year, with profits down and demand softening. Its annual sales jumped by about $31 billion, or nearly 40%, from the fiscal year that ended in January 2020 to the fiscal year that ended this January.

In the previous quarter, the discounter's problems gathered momentum as it coped with higher shipping costs and popular pandemic purchases such as bicycles and kitchen supplies lingered on the shelves. The retailer's shares fell as it missed Wall Street's profit expectations for three consecutive quarters.

After Target canceled orders and cleared excess inventory, another storm cloud emerged: shoppers became thriftier.

Target showed signs Wednesday that it's getting its inventory and profits back on track. Its fiscal first-quarter profit beat expectations, and its gross-margin rate of 26.3% was up from a year earlier as shipping costs fell and the retailer had fewer markdowns.

Still, the operating margin rate still has not returned to pre-pandemic levels. That won't happen until the next fiscal year or later, the company said in February.

Inventories were down 16% year-over-year at the end of the quarter, driven by a 25% decline in discretionary categories. The company ordered more food and high-volume items to better reflect the change in customer spending.

Other retailers also saw a change in customer purchases. On Tuesday, Home Depot missed sales expectations and lowered its forecast. The company's chief financial officer, Richard McPhail, said customers are buying fewer big-ticket items and embarking on smaller projects. Additionally, he added that they are spending again on services and have already purchased many items they needed when they were stuck at home due to Covid concerns.

Cornell of Target pointed out another problem for retailers: organized retail theft. He said Target expects shrinkage to reduce retail profitability by more than half a billion dollars compared to last year.

"The unfortunate reality is that violent incidents are on the rise in our stores and throughout the retail industry," he said in a phone call with reporters.

He added that the trend is hurting the shopping experience by leaving customers with half-empty shelves and employees terrified.

Although Target reported a better-than-expected quarter on Wednesday, its executives stressed that the strain on U.S. households will present it with challenges in the near future.

"Consumers are under pressure," Hennington said in a call with reporters. "Continued inflation, running out of savings and just economic uncertainty in general are impacting their decision-making and they're making trade-offs."

Still, she said Target is getting them to open their wallets by offering Christmas-themed merchandise, new products and lower prices. Sales of groceries, decorations and gifts during Valentine's Day and Easter, movie-themed toys and fresh collections of women's dresses increased.