After a full year of sales declines, it's clear American consumers are making Target prove its value as they continue to stretch their dollars and shop around in the face of higher interest rates and prices.
It's also clear that Target is testing Wall Street's patience. The Minneapolis-based retailer's shares lost 8% of their value Wednesday and helped drag down the broader stock market along with news that Federal Reserve officials were dissatisfied with inflation numbers and could boost interest rates again.
Target said its comparable sales were down 3.7% in the most recent quarter when Walmart's were up 3.8% and Amazon saw increases as well. Executives also said Target has lost some ground with essential home products like groceries and paper towels.
Target also saw a slight drop in profits for February, March and April, which missed Wall Street estimates. Target's share price was down all day as investors, excited after Walmart's healthy earnings report last week, were left disappointed.
Still, the severity of the sales drop-off has continued to lessen over the past few months with executives saying they can right the ship in the summer.
"We are not yet satisfied with our topline performance, and we're far short from where we expect to operate over time," said Target CEO Brian Cornell in a call with media this week. "However, we've seen sustained improvement in multiple business drivers over the last several quarters. This reinforces our confidence that we're moving in the right direction."
While Target leaders said they see signs of improvement, including splurges on activewear and the latest Taylor Swift album, the earnings report came on the heels of an announcement Monday that the chain would cut prices on 5,000 items. This year Target also has reimagined its Target Circle loyalty program to make it easier for customers to take advantage of deals and launched low-price brand Dealworthy, which includes items like cotton swabs and toothbrushes priced at 99 cents.
The fight for consumer dollars amid stubborn inflation is fierce. Home Depot also saw declining sales for a third quarter in a row as homeowners put off improvements.
Target has always focused on both quality and price, said Christina Hennington, Target's chief growth officer, in a Wednesday call with analysts.
"So, value, affordability and how we deliver that is always and has always been important," she said. "It is even more important during this time."
The doubling down on value can't come soon enough for Target, analysts say.
"Target is known as a little bit more of a discretionary retailer," said Michael Baker, senior research analyst at D.A. Davidson Cos. "They just don't do as well as some [other retailers] in this kind of environment when consumers are a little bit more strapped and a little bit more focused on needs versus wants. … Consumers more think of Amazon and Walmart at times when they are looking to save money."
Target's new strategies to lower prices and highlight sales are "a good start at remedying the growing issue of value, but we wonder whether it will be enough to stem the tide of customer erosion," said Neil Saunders, managing director of GlobalData, in a statement. Target also is losing customers to places like Amazon because of some points of friction in stores including restricting the use of self-checkouts to people with 10 or fewer items, Saunders said.
"The problem here is that once customers have defected, they are very unlikely to shift their business back. In short, Target needs to get back to looking at things through a customer rather than a corporate lens," Saunders said.
On Wednesday, Target said stores have seen a rise in customer satisfaction scores related to checkout.
And Walmart, even with its rosy forecast, said it had 7,000 rollbacks on prices throughout the store. At the same time, it launched a new private brand of gourmet food last month to try to get shoppers to spend more. While the majority of Walmart shoppers come from low- to middle-income households, the retailer's chief financial officer, John Rainey, said last week that most of its gains were from more affluent households.
He also said Walmart saw more spending on non-discretionary items such as groceries and household essentials.
That's where Target is losing the shopping battle. Its frequency category, which saw enormous gains during the pandemic, had sales declines in the low single digits over the three-month quarter as shoppers went elsewhere. Target also reaped less benefits with product price inflation cooling as compared to a year ago.
"I think people go to Target for some other things and pick up groceries. It's not always their main shop," said Joe Feldman, senior managing director and the assistant director of research at Telsey Advisory Group.
Walmart sets the tone for prices and other retailers just end up having to follow, Feldman said.
Shoppers are still turning to Target for beauty supplies. And while Target's home department and hardlines category (think electronics, hardware and sporting goods) saw sales declines, there were some bright spots in the past few months such as the Prince pickleball equipment launch and an exclusive version of Taylor Swift's "The Tortured Poets Department" album, which became the biggest music pre-order in Target's history.
Apparel sales, which have suffered as consumers continue to cut back on discretionary spending, improved by about 4% with the help of Target's Wild Fable and All in Motion labels and a limited-time collection with wrap-dress icon Diane von Furstenberg. However, sales in the apparel category were still down compared to a year ago.
The loyalty revamp also showed early success, executives said. The April Target Circle Week had millions more customers than last year.
Plus while in-store sales were down 4.9% in the quarter, digital comparable sales were up 1.4%, the first increase in online revenue in more than a year.
For the summer and the remainder of the year, Target executives hope to have flat to 2% sales growth.
Baker, of D.A. Davidson Cos., said he thinks Target will at least be able to get to flat sales especially as the chain laps sales that dropped more than 5% last summer and consumer trends begin to normalize.
"I think we are bouncing along the bottom in terms of sales trends," Baker said.