Target’s Q1 Brings Better-Than-Expected Earnings

Retailer remains cautious for the remainder of the year

5/17/2023

While Target's comparable digital sales declined, its Drive-Up service saw high-single digit growth.

Target Corp. knew going into the first quarter of 2023 that it would be working against changing consumer shopping patterns and the growing issue of retail shrink. While its total revenue grew a mere 0.6% over the same quarter last year, that reflects $25.3 billion in profit for the period.

Target sales grew 0.5% in Q1, reflecting flat comparable sales combined with sales from new locations, while traffic grew 0.9%, on top of 3.9% in Q1 of 2022. Comparable store sales increased 0.7%, offset by a decline in comparable digital sales, though same-day services saw mid-single digit growth with high-single digit growth in Drive-Up.

"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,” said Target chairman and CEO Brian Cornell. “It's required agility and the ability to flex across our multi-category portfolio as we lean into value and the product categories our guests need most right now. Thanks to the team's dedication, we saw an increase in guest traffic in Q1, with total sales increasing and profitability ahead of expectations.”

The retailer saw expected softness in discretionary categories, though strength in beauty, food and beverage, and household essentials helped offset those losses. Inventory at the end of Q1 was 16% lower than last year, reflecting a more than 25% reduction in discretionary categories. Additionally, Q1 GAAP and adjusted EPS were ahead of expectations, reflecting a higher gross margin rate compared with last year.

Q1 operating income margin rate was 5.2%, compared with 5.3% for the same period in 2022, while gross margin rate was 26.3%, up slightly from 25.7% year over year. Target says this year’s margin rate reflected the benefit of lower freight costs, retail price increases, lower clearance markdown rates and lower digital fulfillment costs, though the benefits were partially offset by an increase in retail shrink.

Target is still on track to invest $4 to $5 billion in strategic growth initiatives over the remainder of the year. Based on softening sales trends in Q1, however, the retailer says it is planning for a wide range of sales outcomes in Q2, including a low-single digit decline in comparable sales. Target is maintaining its prior guidance for the full year, including expected comparable sales from a low-single digit decline to a low-single digit increase and operating income growth of more than $1 billion.

“As we look ahead, 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,” Cornell said. “We are making significant investments in strategies to prevent this from happening in our stores and protect our guests and our team. We're also focused on managing the financial impact on our business so we can continue to keep our stores open, knowing they create local jobs and offer convenient access to essentials.”

Continued Cornell: “For the full year, we are maintaining our full-year financial guidance, based on the expected benefit from efficiency and cost-savings efforts and our team's continued focus on agility, flexibility and retail fundamentals in the face of continued challenges including inventory shrink. At the same time, we will continue making long-term investments in our stores, supply chain and our team, positioning Target for profitable growth and market-share gains in the years ahead."

Target isn’t slowing down when it comes to reaching its long-term goals. The company shared in February that it plans to invest $100 million to ramp up its next-day delivery capabilities, and that it is on track to reach more than 15 sortation facilities by the end of 2026. It is also currently testing larger capacity delivery vehicles in two of its sortation center markets, with plans to expand to all markets in the next few years.

Minneapolis-based Target Corp. is No. 6 on The PG 100, Progressive Grocer’s 2023 list of the top food and consumables retailers in North America, with nearly 2,000 locations.