While Target’s price cuts hit the mark in Q2, the retailer strikes a cautious outlook ahead

The situation: While Target’s comparable sales rose 2.0% year over year (YoY) in Q2—the first positive growth in five quarters—the retailer took a “measured approach” with its outlook given that “the range of possibilities and the macroeconomic backdrop in consumer data and in our business remains unusually high,” said COO Michael Fiddelke during the company’s earnings call.

• Even as the company maintained its full-year comparable sales forecast range of flat to 2%, it said it expects the increase will likely be in the lower half of the range.
• However, it did raise its profit guidance; it now expects adjusted earnings per share to range from $9 to $9.70, up from the previous range of $8.60 and $9.60.

Hitting the mark: There was plenty of data within Target’s results to suggest the retailer is turning its fortunes around.

• Earnings per share were $2.57, up over 42% YoY, easily outpacing the $2.18 analysts expected.
• Revenues were $25.45 billion, up 2.6% YoY, ahead of the $25.21 billion expected.
• Digital comparable sales grew 8.7%.
• Discretionary sales trends showed meaningful improvement. Apparel comparable sales, for example, grew more than 3% YoY in Q2, roughly a 5-percentage-point increase from Q1.
• Target reported that its traffic grew 3% YoY (Placer.ai's data found a 2% YoY increase). Target Circle Week, which took place in July, drove shoppers to the retailer’s stores with weekly visits for the week of July 8 up 6.8% relative to the year-to-date weekly average, and up 8.7% compared with the event last year, per Placer.ai.

However, context is important. For example, while Target’s revenues showed growth YoY, they were down 2.5% compared with the same period in 2022.

Zeroing in on value: Target is navigating a challenging landscape, said CEO Brian Cornell. “Given the significant headwinds [consumers] have faced with inflation over the last few years, consumers continue to focus on value as they work hard to manage their household budgets,” he said. “While they continue to turn out and shop around holidays and other seasonal moments, many are delaying purchases until the moment of need.”

To drive shoppers to spend, Target is leaning into value by adding hundreds of new products to its high-quality, well-regarded up&up private label brand, relaunching its Target Circle free loyalty program (and rolling out a paid membership program), and cutting prices on about 5,000 everyday items.

Our take: For the first time in a while, Target has some positive momentum. Big seasonal moments—such as back-to-school, back-to-college, Halloween, and, of course, the holidays—should help it maintain that forward progress especially as it leans into value with low-cost items like 50 cent notebooks and $5 backpacks, and discounts for college students looking to outfit their dorms.