Target sales are finally showing a turnaround, but that doesn’t mean next few months will be easy

Target has started to turn the tide, yet another signal consumers remain resilient and willing to spend.

Ending a year of sales declines, Minneapolis-based Target announced Wednesday morning that it had clawed its way back to sales growth this summer thanks to customers who are shopping again for clothes and other discretionary items and price reductions that have helped make essentials like groceries more affordable.

Like Walmart last week, Target said its same-store sales were up in May, June and July. For Target, the jump was 2% over the same period last year, when customers pulled back because of higher prices and when the company was embroiled in controversy over its Pride assortment.

Target’s profits also blew past analysts’ expectations, with net income up 42.7%.

“Our results show a very clear story,” said CEO Brian Cornell in a media call this week. “We made a commitment to get back to growth and our team delivered.”

On Wednesday, Target’s shares jumped more than 11%.

The turnaround comes at a critical time for Target, which had seen four straight quarters of sales declines while one of its biggest competitors, Walmart, made inroads with Target’s trademark higher-income shoppers. Last week, Walmart also beat expectations and raised its financial outlook for the year.

Target’s positive quarter was a relief to Wall Street as it helped provide assurance that the U.S. consumer is still spending even in the face of economic challenges. Further evidence came last week when the U.S. Commerce Department announced overall retail sales increased 1% from June to July, the biggest jump in more than a year and a half.

GlobalData managing director Neil Saunders said in a statement that Target’s results were a “proof point that while consumers remain constrained and cautious they are not in recession mode.”

But retailers like Target have to make it worth their while for people to spend by keeping prices low and their products on trend, said Oliver Chen, a retail analyst at TD Cowen.

“The consumer is still under pressure and also delaying and looking for value,” Chen said. “Election years are not that fun either because when there is uncertainty, consumers don’t like to spend. Consumers are doing what I will call ‘value hacking’ and ‘customized moderation.’ They’re doing bougie on a budget so they are trading up and down so it is really about executing to that.”

To Amanda Stombaugh, going to Target is a treat. The 39-year-old mother of three shops at Target several times a week for everything from groceries to kids’ clothes.

“I always want to take a lap in Target, grab a Starbucks,” Stombaugh laughed. “It’s become like a family affair. My 9-year-old daughter is now also obsessed with Target. It’s become a fun outing and something we like to do together.”

Stombaugh, of Inver Grove Heights, finds Target convenient because she can find everything there and believes the store’s products are higher-quality than other general merchandisers. However, like many other consumers, she has shopped more for things on sale and store brands to try to save money.

“I’ve felt the pressure of inflation just like everybody else,” she said. “The price of everything is astronomical.”

To coax consumers into spending, Target has strengthened its brands portfolio, revamped its loyalty program and cut prices on thousands of everyday items. Target also held its popular Target Circle Week sales during this quarter. Target leaders say consumers have responded positively to the deals.

“While the economic data remains mixed, we see a consumer who is still willing and able to spend,” Rick Gomez, who recently assumed the role of chief commercial officer, said in a call with analysts. “Yes, they’re still being choiceful. Yes, they’re budget-conscious and, yes, they’re hunting for deals and everyday value. But they’re also willing to shop when they find that right combination of fashion and newness at the right price.”

A key positive for Target this summer is that apparel, which has taken a backseat as consumers have saved their dollars for essentials, saw sales growth of more than 3%. Customers gravitated to Target’s owned clothing brands such as its athletic line All in Motion and young contemporary clothing label Wild Fable. There was also improvement in home item sales from last quarter.

The changes, not only in how much people are spending but what they are buying, point to a potential recovery of discretionary spending that has been missing as consumers have had to cut back with living costs like car insurance increasing significantly over the past two years.

“We certainly think that over time in categories like home led by kitchen, as these purchase cycles become ones that need to be replaced, you’re going to see some strength in those categories,” Cornell said in the call with analysts.

Food and essentials sales grew compared with 2023, unlike at the beginning of the year when Target’s frequency category saw sales declines in the low single digits.

Traffic to Target stores and its website increased by 3% as opposed to the nearly 5% drop last year when some consumers pushed for a boycott of Target in response to some of its assortment to celebrate Pride month.

According to Placer.ai, which studies anonymous cell phone data to track foot traffic, Target’s number of shoppers started off on the decline this year with monthly visits down as much as 8.5% in January compared with the same time in 2023. However, foot traffic at Target has improved over the past three months to positive growth including an almost 5% increase in monthly visitors in July.

Target is also still in the thick of the back-to-school season, which should help bolster its traffic numbers heading into other seasonal moments like Halloween.

Target’s quarterly profits were about $1.2 billion, up from $835 million in the same quarter last year. Total revenue was up 2.7% to $25.5 billion.

“Expectations were low and the comparisons were easy, but the 3% traffic growth, the positive in apparel, the green shoots they’re seeing in some of the other categories I think tells you the investments they’ve been making, the changes they’ve been making [have worked],” said Brian Yarbrough, an analyst with Edward Jones. “It’s the old Target way of you put good value with good product and consumers will respond.”

Still, Target will need to stay on its toes. Consumers continue to wait until right before they need something before they make purchases, Cornell said. Some categories like electronics are still soft. Target is also seeing increased competition from bargain retailers that are attracting more Target customers.

Target conservatively forecast a 0% to 2% increase in comparable sales for the full year, with Target leaders saying they believe the increase will more likely be in the lower half of that range.