Target released its second-quarter financial results, revealing the company experiencing more robust earnings but weaker sales, causing the retailer to undergo its first quarterly revenue drop in six years.
Driven by a higher gross margin rate, the company experienced an operating income margin rate of 4.8% in the second quarter, more than three percentage points higher than last year. The company also experienced profit recovery from last year’s inventory actions, with second-quarter GAAP and adjusted EPS of $1.80, more than four times what it was a year ago.
In contrast, comparable sales experienced a 5.4% decline, with declines in discretionary categories, indicating the retailer is struggling to win over consumers in the face of inflation. The company did experience growth in frequency businesses, including essentials, beauty, and food and beverage.
At the end of the second quarter, inventory saw a 17% decrease, with a 25% reduction in discretionary categories, partially offset by inventory investments supporting strategic investments to support long-term market-share opportunities and inventory investments to support frequency categories.
Same-day services grew nearly 4%, with an almost 7% growth in Drive-Up.
The company is lowering its total year sales and profit expectations, with full-year GAAP and adjusted EPS expected to be $7.00 to $8.00, which is lower than the prior range of $7.75 to $8.75.
“In our view, Target is one of the more exposed retailers to the frugal mindset that has taken hold of shoppers,” said Neil Saunders, managing director of GlobalData.“This is mostly because a lot of what Target sells is discretionary, and traditionally, a high proportion of sales are unplanned. This is precisely the spending that consumers are curtailing as times get tougher.”
Recent data from mobile analytics and business intelligence firm GWS found a broad decline in Target’s mobile app usage, with an 8.6% decline in daily active users in the second quarter.
The company averaged only 4 million daily active users in July 2023, a 4.7% decline from the same period last year. That is an increase compared to 3.5 million users in June 2023 and 3.6 million in May 2023, possibly showing a future upward trend in usage.
Other retailers are experiencing growth in mobile app activity, including Temu, Shein, and Walmart, which is particularly significant, with 28% of Target mobile app customers using the Walmart mobile app as well.
“Target’s app decline shows that all companies, from main street megastores to smaller shops, must adopt a mobile-first approach to shopping which consumers crave,” said Dr. Paul Carter, chief executive officer of GWS.“Despite tough retail conditions, Walmart’s mobile app is on the rise, and given the overlap in user base between the two firms, it’s likely that this rise, as well as a boom in cheap shopping apps like Temu, is at Target’s expense. In recent days we’ve seen Target announce innovations to its app, like the launch of its Starbucks Drive Up perk, showing the firm recognizes the importance of mobile-led retail, but more must be done to enhance its mobile experience and understand the needs and wants of its mobile audience if it is to thrive in the future.”
Target has continued to find ways to differentiate itself within the market through its app, including enhancing Drive-Up offerings, with chief operating officer John Mulligan noting in a recent earnings call that they utilized customer feedback when adding Starbucks and completing returns through the Drive-Up service. The average wait time for a return to be processed through Drive-Up is three minutes, and they hope Starbucks Drive-Up will provide a similar level of service, especially with hot beverages needing to be served promptly.
"Based on what we've learned during the test period, we're confident we can scale up this service while consistently maintaining our service standards," said Mulligan. Target is currently rolling out Starbucks at Drive Up nationwide, with hopes that is completed by the end of October for the Pumpkin Spice Latte Season.