Target reports sales drop for the first time in six years

Target Corp. experienced a humbling past few months when its sales and traffic declined for the first time in years, a result of blowback from its Pride assortment and continued cost-cutting by inflation-weary consumers.

On Wednesday, Target reported its comparable sales dipped 5.4% in May, June and July, a larger fall-off than what executives expected, with store sales declining 4.3% and online sales taking a bigger 10.5% stumble. It was the first time comparable sales — or sales from stores open for the past year — dropped for the Minneapolis chain since the spring of 2017. Store and online traffic was down 4.8%, another rare slide for Target.

Target generated total revenue of $24.8 billion in the second quarter, not reaching Wall Street analysts' estimates. However, the company earned $1.80 a diluted share, better than the consensus $1.39 and a complete profitability turnaround to last year around this time when Target's profit took a nosedive falling 90% as the company tried to shed excess inventory.

Target shares were up about 4% Wednesday morning thanks to Target's net income of $835 million, which was more than four times higher than a year ago.

While much of the sales decline was anticipated because of persistently tough economic conditions, the Pride debacle was more unexpected. In May, Target announced it was pulling some unspecified items from its product lineup celebrating the LGBTQ community during June's Pride month because of threatening customer behavior and online outrage. But in turn, some LGBTQ advocates voiced concern Target's decision undermined its inclusive messaging. Since mid-May, Target's share price has dropped about 20% and hasn't recovered, which some have argued was in direct response to conservative calls for a Target boycott.

In a call with reporters this week, Target executives were candid on the controversy they previously evaded.

"Looking forward, we'll continue to celebrate Pride and other heritage moments, which are just one part of our commitment to support our diverse teams and guests," Target CEO Brian Cornell said. "However, as we navigate an ever-changing operating and social environment, we're applying what we learned to ensure we're staying close to our guests and their expectations of Target."

Pride fallout

Cornell said he thinks Target made the right decision at the time to adjust its Pride assortment. But going forward, the company is re-evaluating how it commemorates some of its cultural celebrations, such as Pride, Black History Month and Asian American and Pacific Islander Heritage Month.

Target will have more focused assortments — meaning possibly fewer products than the hundreds they usually offer — and will evolve its digital and store presentations. It will also reassess the external partners it collaborates with, said Christina Hennington, Target's chief growth officer.

"Our goal is for our assortment to resonate broadly and deliver on the Target brand promise," Hennington told analysts on a Wednesday call. "In this case, the reaction is a signal for us to pause, adapt and learn so that our future approach to these moments balances celebration, inclusivity and broad-based appeal."

Target's review of its Pride response is similar to how Anheuser-Busch InBev has re-examined its marketing of Bud Light following conservative backlash the beer brand received after it partnered with transgender influencer Dylan Mulvaney this spring in a digital promotion. Earlier this month, Anheuser-Busch InBev reported its U.S. revenue declined 10.5% in the second quarter. The company said during a call with analysts that, based on customer feedback, Bud Light drinkers just "want to enjoy their beer without a debate."

Similarly, Cornell said he hopes his stores are welcoming to everyone.

"We want to make sure Target is that happy place for all of our guests," he told analysts.

But Target's chief financial officer Michael Fiddelke said the company "can't isolate the Pride impact from the many other factors" that also affected Target's business this quarter, including the impact of inflation, economic pressures on consumers and the lapping of price markdowns and subsequent shopper activity Target had last year.

Still price-conscious

Sales softened in the second half of May into June before beginning to recover in July, Target leaders said.

Groceries (such as snacks, candy and beverages), essentials and beauty continued to be stronger categories for Target as discretionary categories like apparel and hardlines (items like electronics and sports equipment) softened further during the quarter.

"The good news from today is that a lot of this is expected, and you see that from how the stocks reacted," said Joe Feldman, a research analyst at Telsey Advisory Group.

It is going to take some time for some of these categories like home to recover, since many people stocked up on those items during the pandemic and now are spending their money on other wants and needs, Feldman said. Target management is controlling what they can control well, such as costs, Feldman said.

"You can control your expenses. You can control how you run your business … It's a lot harder to control sales," he said.

In the meantime, Target has made some improvements to its discretionary offerings. It has done a facelift of its Threshold home brand and plans to launch a new kitchenware line soon.

It's Hearth & Hand with Magnolia brand recently released a collection of limited edition tumblers. Stores across the country are rolling out a drive-up feature to offer Starbucks food and drink delivery to drivers picking up orders. Target will also update its website to improve search and other functions.

Neil Saunders, managing director for data analytics firm GlobalData's retail division, said Target can still do more to revamp its apparel and home lines and improve marketing.

"With the exit of Bed Bath & Beyond, Target has an opportunity to pick up share across many different home segments. ... However, it will need to make more effort around advertising and targeted marketing, especially online, if it is to win over shoppers," Saunders said.

Resilient retail

The company has lowered its comparable sales forecast to predict a mid-single-digit decline for the remainder of the year.

"Consumers continue to face difficult choices and ongoing challenges from managing budgets in the face of higher prices to resuming student loan payments," Hennington said.

The retail sector has continued to remain resilient despite economic pressures, though it still has a steep challenge for the remainder of the year. Retail sales rose 0.7% in July, according to recent data from the U.S. Department of Commerce. However, so have consumer prices, even if the rate of inflation has cooled.

Consumers have continued to cut back on superfluous spending and big projects to stay on budget. Home improvement superstore Home Depot recently reported a sales decline as homeowners have put on hold big-ticket investments such as patio renovations and new appliances. One retailer that likely will do well is Walmart, which reports its earnings Thursday, because it concentrates on selling necessities at competitive prices.

Target has been more deliberate with its messaging on prices, especially for its private-label or owned brands which are often cheaper than brand-name rivals.

Target's inventory, which was a problem last year as the company dealt with too many bulky products that weren't selling, was 17% lower than last year as the retailer reduced the amount of products it had in discretionary categories by 25% to better stock essentials and other more frequently purchased items this quarter.

Target also said inventory shrink, which has seen an outsized impact from retail crime, has continued to be a problem. Target is adding more security staff and theft deterrent tools, like locked cases of frequently stolen items across its stores, Cornell said.