Target lowers forecast after sales drop for the 1st time in 6 years

Target on Wednesday lowered its sales forecast for the rest of 2023 after posting its first quarterly drop in earnings in six years as shoppers continue to shy away from discretionary buying.

The Minneapolis-based retailer said comparable sales tumbled 5.4% during the three months ended July 29, though food-and-beverage sales as well as sales of beauty and essentials partially offset those declines. Same-store sales fell 4.3% during the second quarter.

Food-and-beverage sales rose in the “low single digits,” Target said, with particular strength in snacks, candy and beverages.

Digital sales shrank 10.5% during the quarter, lapping 9% growth in the same period a year ago.

Going forward, Target said it predicts comparable sales “in a wide range” around a mid-single decline for the rest of the year, including during the third quarter.

Total revenue fell 4.9%, to nearly $24.8 billion.

But Target’s margins improved during the period. The retailer’s operating income margin rate was 4.8%, up from 1.2% during the second quarter of 2022. And its gross margin rate was 27%, compared o 21.5% a year ago.

The improvement was driven by lower markdowns and inventory-related costs, lower freight costs, price increases, and lower supply chain and digital fulfillment costs, the retailer said, adding that the benefits were partially offset by increased inventory shrink.

Shrink was cited as a major headwind for Target last quarter when CEO Brian Cornell called it a “worsening trend that emerged last year,” one that will likely cost it more than $500 million this year versus a year ago. Shrink decreased profits during Q2 nearly a full percentage point compared the last year, Target noted.

Not only is theft a growing problem, but Cornell on Wednesday told analysts that Target stores have seen a 125% increase in violence and threats of violence during the first five months of the year.

A “negative guest reaction” to Target’s Pride Month assortment in June led to safety threats for employees, Cornell said, forcing the retailer to pull some of the merchandise.

“We denounce violence and hate of all kinds,” he said. “Pride is one of many heritage moments important to our guests and our team, and we’ll continue to support these moments in the future.”

Target opened five new stores during the quarter, for a total of 11 openings in 2023. The retailer has said it intends to open 20 locations this year.

Target has focused in recent quarters on reducing its inventory in discretionary categories, with inventory at the end of the second quarter 17% lower than a year ago, the retailer said.

Starting this quarter, Target will begin undertaking a remodel of its digital experience, to “balance the love of discovery with ease of navigation,” Christina Hennington, chief growth officer, told analysts.