Target Corp on Wednesday forecast a grim second quarter as the retailer struggles with consumers shunning non-essentials such as electronics and home goods in the face of persistently high prices, but maintained its full-year profit expectations.
U.S. retail sales have remained resilient despite higher prices but consumers have been careful about their spending, hurting companies such as Target and Home Depot, whose merchandise largely consists of discretionary products.
“American consumers continue to face difficult trade-off decisions as they juggle the wants and needs of their families ... The fear of a looming recession weighs heavily on many American families,” Senior Target executive Christina Hennington said on a post-earnings call.
The company’s lacklustre forecast follows bleak numbers from U.S. home improvement chain Home Depot, which said it expects a steeper-than-expected drop in annual profit. Bigger rival Walmart, which gets more than half of its revenue from groceries, is set to report earnings on Thursday.
“These continued signs of caution among consumers have reinforced why we entered this year with a conservative inventory position,” CEO Brian Cornell said.
Inventory at the end of the first quarter was 16% lower than last year, reflecting more than a 25% reduction in discretionary items, helping gross margins improve.
Shares of the company, which beat first-quarter estimates, were up about 3% in early trading, after see-sawing before the bell.
“Target’s original guidance for the year was on the conservative side ... Against that backdrop, we think Target’s print is a step in the right direction,” D.A. Davidson analyst Michael Baker said.
Target executives used the word “cautious” at least 13 times during the hour-long earnings call.
Target also warned theft and organized crime could reduce this year’s profitability by more than $500 million, compared to 2022 when inventory shrink was over the $650 million expected.
CEO Cornell called the issue “increasingly urgent.”
The pressure in discretionary categories outweighed strong growth seen in everyday essential businesses, finance chief Michael Fiddelke said.
The company is also benefiting from steady demand for beauty products, as well its private-label brands.
Target projected adjusted profit between $1.30 and $1.70 per share, below estimates of $1.93 for the current quarter and forecast comparable sales to decline in the low-single digits.
“There is still some pain points with the consumer and they are still being cautious, which in Target’s case I do think it’s extremely justified going forward,” Jessica Ramirez, senior analyst at Jane Hali and Associates.
First-quarter comparable sales grew by a better-than-expected 0.7%, helped by a 0.9% increase in store traffic, but digital sales posted a surprise drop.