(Bloomberg) -- Target Corp. ended a string of sales declines in the second quarter, citing improved discretionary spending.
The Minneapolis-based retailer said comparable sales, a key gauge of retail success, rose two per cent in the period — higher than the average estimate of analysts while breaking four straight quarters of contraction. Earnings per share also beat expectations.
The company’s shares, which are trading ex-dividend, rose as much as 17 per cent in premarket trading in New York. The stock has risen 1.3 per cent year to date through Tuesday’s close, compared with a 17 per cent gain for the S&P 500 Index.
It’s the first sign of a turnaround at Target after higher inflation and interest rates prompted consumers to pull back from big purchases and spend less on discretionary products. That hurt categories such as home decor and apparel, which are Target’s bread and butter. Now, higher traffic in stores and rising online sales are helping to reverse the trend.
“We made a commitment to get back to growth, and our team delivered,” Chief Executive Officer Brian Cornell said on a call with reporters. “We are staying on offense.”
Target’s discretionary categories have improved for four straight quarters as consumers prioritize spending on lower-priced necessities over premium offerings. Recent price cuts on essentials such as milk and bread also helped lift sales of groceries and other basics.
Positive traffic indicates that lower prices and a new assortment in discretionary categories are resonating with shoppers, Bloomberg Intelligence analyst Jennifer Bartashus wrote Wednesday. She added that it’s encouraging to see margin expansion even as the company cuts prices on essentials.
Despite the improvements, Target is taking a measured approach with its guidance due to uncertainty about the broader economy. The company maintained its view that comparable sales will be flat to up two per cent this year, but now expects the result to likely be in the lower half of that range. At the same time, Target raised its earnings per share outlook due to “strong profit performance” in the first half.
The quarterly results also benefited from an easier comparison period. A year ago, Target’s business slowed notably following the lengthy pandemic boom, while a controversy around LGBTQ-themed products also weighed on sales. To end the slump, Target executives have zeroed in on the retail basics of prices, assortment and inventory.
The company started a new low-cost store brand and cut prices on about 5,000 staples. Target’s loyalty program has been another area of focus, with a new paid membership program and two “Circle Week” sale events so far this year. Executives said the efforts are drawing consumers, who they said are remaining resilient, and that shoppers are looking for trendy, affordable products.
The results further underscore the contrast between companies selling big-ticket items like appliances and those focusing on necessities. Walmart Inc., a key Target competitor that gets much of its sales from groceries and staples, raised its guidance last week, saying there aren’t any new signs of pressure from increasingly-selective consumers.
Meanwhile, Macy’s Inc. lowered its sales forecast for the year, citing an increase in consumer cautiousness and more discounting by competitors. Home Depot Inc. and Lowe’s Cos. cut their outlooks as the housing market remains frozen and consumers wait for interest rates to drop.
So far, during back-to-school season, shoppers have sought value, including items like US$5 backpacks and 25-cent boxes of crayons, Target executives said, noting that the back-to-college season typically stretches for a longer period.
Consumers have been purchasing products closer to when they need them, according to Target executives, and that trend is seen extending into the holidays, which is the most important season for retailers.
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