Target’s Discretionary Pullback Leads to Profit Gains, But Outlook Cut – WWD

Target Corp. turned in a very profitable second quarter and easily topped bottom line expectations, after cutting inventory and pulling back on discretionary categories like apparel. 

But a cautious consumer and sales weakness is expected to catch up to the retailer, which also cut its outlook for the year.

Net income for the quarter shot up more than four times to $835 million, or $1.80 a diluted share, from $183 million, or 39 cents, a year earlier. 

Earnings per share came in 37 cents ahead of the $1.43 analysts expected, according to FactSet.

Still revenues for the three months ended July 29 fell 4.9 percent to $24.8 billion from $26 billion. And comparable sales dropped 5.4 percent with growth in the essentials & beauty and the food & beverage categories offset by declines in discretionary categories, which includes apparel.

Target has been under the spotlight this summer since its Pride collection sparked protests from some consumers as well as threats, prompting the retailer to pull some products. 

The retailer also faced a very different environment a year ago, when it was in the midst of a painful inventory realignment after the company ramped up orders post-pandemic, but ran into a suddenly more wary consumer faced with inflation not seen since the early ‘80s. 

That reset has the company on much different footing today.

Inventory was down 17 percent at the end of the quarter, driven by a 25 percent decline in discretionary categories. 

But this trick of doing less with more — driving profits up with sales falling — will only last so long and Target cut its outlook for the year given the recent sales results. 

The discounter is now looking for earnings this year of $7 to $8 per share, down from the $7.75 to $8.75 projected in May. Given that the second-quarter came in ahead of expectations, that means there will be even more pressure felt in the back half numbers. 

Comparable sales for the year are now forecast to be “around a midsingle digit decline” where the company had been looking for “a wide range from a low-single digit decline to a low-single digit increase.”

Investors chose to focus on the here and now, locking onto strength in the quarter and driving Target share up 8.3 percent to $135.40 in premarket trading.

Brian Cornell, chair and chief executive officer of Target, said: “Our second quarter financial results clearly demonstrate the agility of our team and the resilience of our business model, as we saw better-than-expected profitability in the face of softer-than-expected sales. With the benefit of a much-leaner inventory position than a year ago, the team was able to quickly respond to rapidly-changing topline trends throughout the second quarter, while continuing to focus on the guest experience.

“As we move into the fall, the team is gearing up for the biggest seasons of the year, with a focus on continuing to serve our guests with newness throughout our assortment,” Cornell said. “At the same time, we continue to take a cautious approach to planning our business, and have therefore adjusted our financial guidance in anticipation of continued near-term challenges on the topline. This approach, along with the long-term investments we’re making in our business and strategy, position us to deliver sustainable, profitable growth in the years ahead.”

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