Page four of Target's (TGT) earnings release on Wednesday has a number that is almost as surprising as hearing chairman and CEO Brian Cornell talk about a $500 million profit hit this year from "organized retail crime."
Comparable digital sales fell 3.4% from the same quarter last year. A year earlier at this time, this metric showed 3.2% year-over-year growth.
The first-quarter result marked the second straight quarterly decline in Target's comparable digital sales. Fourth quarter sales on this basis dropped 3.6% year over year.
Cornell says it's not that consumers aren't shopping online. It's that they are so cautious right now that it's hurting spending on discretionary items, which are often bought and shipped online.
Moreover, consumers have migrated back to Target stores to stock up on everyday essentials in the food and staples departments.
"We continue to see a guest who is shopping in our stores and using our same-day services. They're using pickup, they're using drive-up, and we know that inside of that same-day pack are the items like food, beverage, and household essentials. Those are things you need each and every day. Many of the items that we ship directly to your home are part of that discretionary portfolio where we have seen a consumer make changes ... and we have seen trends slow," Cornell said on a call with reporters.
He added: "I think the trends that we're seeing in digital really mirror what we're seeing from an overall consumer spending standpoint where they're investing more in those household essentials and food and beverage items, and they're shopping more cautiously when it comes to all things discretionary."
The weak online sales print was one component of a mixed — at best — quarter from the discount retailer as dissected below.
Target shares rose 2.5% in afternoon trading. The company's ticker page was the most active on the Yahoo Finance platform.
The Earnings Rundown
Net Sales: +0.6% year over year to $25.3 billion vs. estimates for $25.18 billion
Gross Profit Margin: 26.3% vs. 25.7% a year ago and estimates for 26.52%
Inventory Growth: -16% year over year vs. estimates for -5.1%
Diluted EPS: -6.2% year over year to $2.05 vs. estimates for $1.80
What else caught our attention
Good: Inventory fell 16% from the prior year, led by a 25% reduction in the stock of discretionary categories like apparel and home goods.
Good: Beat Wall Street earnings estimates for the second straight quarter after three straight misses.
Not So Good: Second-quarter earnings per share are seen in a range of $1.30 to $1.70 vs. $1.96 estimate.
Mixed: Full-year earnings per share seen in a range of $7.75 to $8.75 (reiterated) vs. $8.36 estimate.
What Wall Street is saying about the quarter
Citigroup (buy rating): "1Q results were better than feared, with comps in line and gross margin and EPS above consensus. But trends softened in April and softness has continued into May, leading to 2Q guidance that is weaker than consensus ($1.30-1.70 vs. consensus of $1.95). Management reiterated annual guidance but between the 1Q beat and weaker 2Q outlook, it puts a little more weight on second half by about $0.10. Inventory levels continue to improve and were down 16% at the end of 1Q, with discretionary categories down 25%. Given sentiment was negative, and many were braced for a miss, the stock is likely to be flattish with the 1Q beat offset by the weaker 2Q outlook and more second half weighted guidance." - Analyst Paul Lejuez
Stifel (hold rating): "Overall we view the result and guidance as solid in a muted discretionary spending environment. We anticipate FY2023 consensus EPS and Target shares are unlikely to move materially." - Analyst Mark Astrachan
Jefferies (buy rating): "Flat comps in 1Q were better than what we and the buy side had estimated. Consumables items continue to outperform lagging discretionary category sales. Lapping last year’s freight, markdown, and inventory issues ahead creates easy compares near term, but we acknowledge that an underwhelming 2Q guide is likely to make the year more second half weighted. However, we think Target shares are still undervalued at present and see upside from current levels." - Corey Tarlowe
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on the banking crisis? Email [email protected]
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