Pickleball, ads and Taylor Swift: Here are the little things Target says are working, even as sales fall

By Bill Peters

Impact from theft is set to 'reach a plateau this year,' retailer's CFO says

Target Corp. on Wednesday reported results for yet another quarter marked by a hesitant consumer - but at least it has pickleball, advertisers and Taylor Swift.

During the big-box retailer's earnings call, executives tried to highlight the smaller areas where things were still working. Among them, sales in its entertainment category were up by "high-single digits," thanks to an exclusive-edition release of Taylor Swift's newest album, "The Tortured Poets Department."

The company also said its partnership with sports-gear maker Prince "delivered incredible sales momentum in all things pickleball," as pickleball courts have become a much more common sight in cities. Its limited-time partnership with designer Diane von Furstenberg was also paying off, it added.

Other bright spots included Roundel, the business segment that helps brands sell ads through Target's online ecosystem, and which is currently the "fastest-growing part of our business," executives said. The chain also said it grew digital sales for the first time in more than a year, helped by online pickup and delivery orders. Sales in beauty products were up in the low-single digits during the quarter, helped by demand for Ulta Beauty Inc. (ULTA) products in stores.

And after complaining last year about theft in its stores, executives said gross margins ticked higher during the quarter as the impact from "shrink" - or inventory losses attributed to theft, fraud or error - eased. The impact of theft on the retail industry has been hotly debated over the past year.

"Based on our recent physical-inventory counts, we continue to believe that shrink rates are positioned to reach a plateau this year, and in Q1, the results of those inventory counts were favorable versus our expectations," Target Chief Financial Officer Michael Fiddelke said during the call.

Shares of Target (TGT) were down 8.2% on Wednesday. The stock is down 2.8% over the past 12 months.

Shoppers are still shouldering the effects of higher prices and interest rates, which has led many to steer clear of clothing, home goods and other items that take up a good portion of Target's shelf space. Archrival Walmart Inc. (WMT) has drawn a larger share of higher-income shoppers, and Target this week said it would cut prices on some 5,000 items.

Target on Wednesday said it expected same-store sales to be flat to up 2% in its current, second quarter, and expects the same for the entire year. Executives on the call said they were hoping for a bigger rebound during the summer and back-to-school seasons.

Clothing sales still fell during the quarter, but not as much as in previous quarters. Newer offerings - something other retailers are leaning into - helped; so did Target's own clothing lines and its off-the-rack assortment.

"Definitely consumers are responding to newness," Chief Growth Officer Christina Hennington said during the call. "When they see innovation, when they see that at an incredible value, that's what's motivating them to buy. And so our acceleration of percent of newness has just built quarter after quarter."

Still, for Wall Street, the big-picture view of the retailer remained muddled.

"Profitability continues to improve [year over year], but remains below pre-COVID levels, and the return to positive comp sales and market-share gains is uncertain," Roth MKM analyst Bill Kirk said in a research note.

However, D.A. Davidson analyst Michael Baker, in a note on Wednesday, was focused on the rebound.

"The stock has now given back all of the 12% increase following the March analyst day," he said. "Thus, with estimates unlikely to change, [the stock] is now trading at a discount. With comps poised to turn positive and margins still improving, we think this makes for a buying opportunity."

-Bill Peters

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05-22-24 1601ET

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