Target sales ebb in Q2 and it cuts outlook for the year citing inflation and a culture war dustup

Target's second quarter sales were hit by inflation and a negative reaction by some customers, widely publicized on social media, to its Pride merchandise.

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 and sales expectations for 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 the Minneapolis chain brought inventories closer in line with cautionary spending on discretionary items by customers.

Target is among the first major U.S. 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 other retailers.

CEO Brian Cornell said higher 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,” Cornell said. “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.

Home Depot, the nation’s largest home improvement retailer, reported Tuesday second-quarter results that topped profit and sales expectations, but its sales continued to decline. The company said that it's seeing weak sales in certain big-ticket items like patio furniture and appliances, noting that customers are still spending on smaller home-improvement projects.

Walmart, the nation’s largest retailer, reports earnings Thursday. Macy’s, Kohl’s and Nordstrom post quarterly results later this month.

The reports follow the latest government snapshot on retail sales that showed that Americans increased their spending last month on clothing, dining out and online goods — a sign that solid consumer spending is still powering a resilient U.S. economy.

But Target also was hit by another issue: It was among the companies hit by a backlash for its LGBTQ+ support, in particular, its displays of Pride Month merchandise. It pulled some items and made other changes after encountering hostility from some customers who confronted workers and tipped over displays. Company executives told reporters on the call 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.

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.

Target's latest earnings report shows the challenges it faces to stay on top of customer behavior.

Target said it earned $835 million, or $1.80 per share, in the quarter that ended July 29. That compares with $183 million, or 39 cent per share, in the year-ago period.

Sales fell nearly 5 percent to $24.77 billion from $26.04 billion as shoppers focused more on groceries and beauty products instead of discretionary items. Business in the quarter was also hurt because results were being compared with heavy discounting in the year-ago period that was meant to clear unwanted inventory.

Analysts were expecting $1.43 per 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 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 per share of $7 to $8, compared with the prior range of $7.75 to $8.75. Analysts were expecting $7.72 per share for the year, according to FactSet.

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