Target Cuts Profit Outlook for 2023 as Backlash Over Pride Products Eats into Margins
‘As we navigate an ever-changing operating and social environment, we’re applying what we’ve learned to ensure we’re staying close to our guests and their expectations of Target,’ says the chief executive of the company.
Target reported a second-quarter sales drop, dragged down by shoppers’ inflation worries and a negative reaction by some customers, widely publicized on social media, to its Pride Month merchandising efforts.
The Minneapolis retailer expects high-interest rates, which makes credit cards more expensive to use, and higher prices on food to continue to put a strain on customers, and on Wednesday, the chain cut its profit outlook for the year. It also expects sales will decline for the remainder of the year. In lowering its forecast, Target also cited the end of the student loan moratorium, which had provided one-time college students a little more financial breathing room.
Profit came in above expectations, however, as Target brought inventories closer in line with cautionary spending on discretionary items by customers. Shares rose nearly 6 percent in early morning trading Wednesday despite trimming profit expectations for the year.
Target is among the first major American retailers to report quarterly financial results, and the impact of rising prices and elevated interest on its customers will get a lot of attention ahead of a raft of quarterly reports from companies like Walmart and other retailers.
Target faced a unique problem during the most recent quarter, becoming one of the companies that was targeted for its LGBTQ+ support, in particular, its displays of Pride Month merchandise. It pulled some items in particular regions and made other changes after encountering hostility from some customers who confronted employees and tipped over displays.
Company executives said this week that it couldn’t tease out how much the negative reaction had on its business, but once it made the changes, those incidents subsided. Overall sales improved in July from June.
The chief executive of Target, Brian Cornell, said that the company has learned from the backlash and said it will be more thoughtful in merchandise offerings for its heritage months, which celebrate various ethnic and marginalized groups.
“We’ll continue to celebrate Pride and other heritage moments, which are just one part of our commitment to support diverse teams and guests, ” Mr. Cornell told reporters. “However, as we navigate an ever changing operating and social environment, we’re applying what we’ve learned to ensure we’re staying close to our guests and their expectations of Target.”
Mr. Cornell said high prices for food and household essentials are taking a bigger chunk out of the paychecks of customers, who have also pulled back on buying some goods in favor of travel or spending time out of the house in other ways.
“Guests are out at concerts,” Mr. Cornell told reporters on a press call Tuesday. “They’re going to movies. They’ve seen ‘Barbie.’ They’re enjoying those experiential moments, and they’re shopping very carefully for discretionary goods.”
Other retailers are seeing the same thing.
The nation’s largest home improvement retailer, Home Depot, said Tuesday that sales continued to decline after surging in recent years. Sales of big-ticket items, those that may require financing, were particularly hard hit.
Industry analysts will be eager to see if the same forces are impacting other retailers reporting earnings this week, including the nation’s largest, Walmart, on Thursday. Macy’s, Kohl’s, and Nordstrom post quarterly results later this month.
Target earned $835 million, or $1.80 a share, in the quarter that ended July 29. That compares with $183 million, or 39 cents a share, in the year-ago period. Analysts had been expecting profits of $1.43 a share on sales of $25.18 billion, according to FactSet.
Inventory at the end of the second quarter was 17 percent lower than last year, reflecting a 25 percent reduction in discretionary categories like fashion and home furnishings.
Comparable sales — those from stores or digital channels operating for the past 12 months — fell 5.4 percent in the latest quarter. In the fiscal first quarter, sales were unchanged.
Target now expects comparable sales in a wide range around a mid-single-digit decline for the remainder of the year. It also now projects full-year adjusted earnings a share of $7 to $8, compared with the prior range of $7.75 to $8.75. Analysts were expecting $7.72 a share for the year, according to FactSet.