Cautious consumers flattening sales at big retailers, including Minneapolis' Target

Budget-conscious Target shoppers this spring held off on purchases outside what they immediately needed.

Cautious consumers have caused sales at Target Corp. to flatten for the first time after six years of growth, even as the Minneapolis retailer continues to see more shoppers walk through its doors and visit its website.

Target reported its first-quarter earnings Wednesday, indicating even popular retailers with strong customer-drawing power can only do so much to appeal to a consumer who fears a looming recession or needs to scale back non-essential buys in favor of necessities like groceries.

"As it did throughout last year, pressure from inflation and rising interest rates affected the mix of retail spending in [the first quarter] with a further softening in discretionary categories in the March and April time frame," said Target CEO Brian Cornell, in a call with analysts. "This coincided with a deterioration in consumer confidence, reflecting recent events such as the banking crisis that emerged in March. These continued signs of caution among consumers have reinforced why we entered this year with a conservative inventory position."

This week, leaders at Home Depot said consumers are forgoing large home-improvement projects and delaying the purchase of expensive items like grills and appliances. Walmart will also likely affirm a lessening of demand for discretionary products when it reports its earnings Thursday.

Despite the slowdown, Target still beat Wall Street's expectations in terms of profitability. Target netted $950 million, or $2.05 a diluted share, from February through April, better than the $1.76 analysts expected. Target's profits dipped 6%, a much shallower fall than the more than 50% drop that triggered a stock market scare this time last year. Target generated total revenue of $25.3 billion for this last quarter.

Target shares were up more than 2.5% Wednesday.

Target's comparable sales, including its sales from existing stores and online, didn't change compared to the same time last year with digital sales decreasing for the second consecutive quarter.

Similar to the last few quarters for the Minneapolis-based giant, Target customers shifted their spending away from discretionary categories like home decor that were popular during the pandemic to everyday categories like beauty, groceries and household essentials. While inflation has begun to cool off, it has stayed a major factor in customers' buying habits and pushed many to cut back their spending.

"This is a consistent story we've been sharing for a while," said Christina Hennington, Target's chief growth officer. "The consumer is under pressure. The consistent inflation, the running out of savings as well as just economic uncertainty in general is having an impact on their choices, and they're making trade-offs."

It's a story that's playing out across the retail industry. Core retail sales — not including car, gas and restaurant sales — increased 2% last month compared to the same time the year before, showing that while consumers are still spending, they aren't buying products anywhere near the rate they did during the pandemic.

Much of what Target is experiencing now is a return to normal after record sales growth during the heat of the pandemic. Target has had more than 20 quarters of back-to-back comparable sales growth since mid-2017.

"At some point, you knew this was going to slow," said Brian Yarbrough, an analyst with Edward Jones.

Unlike other retailers, Target continues to grow its traffic, Yarbrough said. Store and online traffic rose 0.9% in the first quarter. Target has also improved its inventory position after canceling orders and providing discounts to sell some merchandise last year. Inventory at the end of the first quarter was 16% lower than last year.

"They are controlling the controlables," Yarbrough said.

Target's apparel, home goods and hardlines — products outside apparel like sporting goods and electronics — all experienced sales declines this past quarter similar to what the retailer has seen through the past year. To get the message across that Target can provide affordable purchasing options for reluctant consumers, the store is being more aggressive with its messaging and leaning into the appeal of its owned brands.

But as much as prices matter, Target shouldn't haphazardly lower prices to attract customers, Yarbrough said.

"It's great if you want to bring in lower price points, but I think you have to be really careful," he said. "They don't want to be in a race to the bottom."

Inventory shrink, mostly from theft and organized retail crime, has continued to cut into Target's profits. Target executives said they expected shrink this year to reduce the company's profitability by more than $500 million compared to last year. Some of the company's theft mitigation efforts include installing fixtures to protect merchandise and adjusting stock in affected stores.

After a challenging year, Target has become more conservative with its sales outlooks. Its leaders predict in the second quarter that comparable sales will experience a low-single-digit decline with full-year sales continuing to decline or perhaps achieve a low-single-digit increase.

While Target faces many hurdles this year, the first-quarter report also showed room for opportunity. When adding the benefit of sales from new locations to comparable sales, Target sales actually grew narrowly by 0.5%. Target opened six new stores so far this year with 20 total planned for 2023.

Target is continuing to add to its same-day fulfillment services. By next month, customers will be able to bring back returns at nearly all of Target's stores without leaving their cars using Target's drive-up service.

Target could also benefit from some of its competitors' financial issues. Bed Bath & Beyond filed for bankruptcy last month and has started to wind down operations at its stores as well as sister chain Buy Buy Baby. Target has continued to grow its private label offerings in home goods and baby supplies and apparel. Earlier this month, baby stroller and carrier brand Colugo announced it was expanding its products to more than 400 Target stores nationwide.

"We see, certainly, dislocation in the retail market," Cornell said. "That's going to open up market share opportunities for us."