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(Reuters) -Target Corp on Wednesday forecast a grim second quarter as the retailer struggles with consumers shunning non-essentials such as electronics and home goods in the face of persistently high prices, but maintained its full-year profit expectations.
The company’s merchandise is skewed more toward discretionary products and it has been shifting focus to household essentials and groceries due to sticky inflation and higher interest rates.
“Right now (the American consumer is) spending more due to inflation, saving less and delaying major purchases,” Senior Target (NYSE:TGT) executive Christina Hennington said in a media call.
The company’s lackluster forecast comes a day after top U.S. home improvement chain Home Depot Inc (NYSE:HD) guided a steeper-than-expected decline in annual profit, setting up a cautious run-up to retail behemoth Walmart (NYSE:WMT)’s earnings on Thursday.
Target also beat analysts’ expectations for first-quarter results. Gross margins increased to 26.3%, compared to 25.7% a year earlier, largely helped by reduced freight costs and fewer clearance discounts.
Quarter-end inventory was 16% lower than last year, reflecting more than a 25% reduction in discretionary items.
“Target’s original guidance for the year was on the conservative side … Against that backdrop, we think Target’s print is a step in the right direction,” D.A. Davidson analyst Michael Baker said.
The company’s shares were marginally lower in choppy premarket trading. They had reversed early losses to trade up as much as 2%.
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The maintained forecast comes as Target benefits from steady demand for beauty products and household essentials, as well its private-label brands.
Even though U.S. retail sales rose less than expected in April, the underlying trend was solid pointing to strong consumer spending early in the second quarter even as recession worries rise, data showed on Tuesday.
Target projected adjusted profit between $1.30 and $1.70 per share, below estimates of $1.93 for the current quarter and forecast comparable sales to decline in the low-single digits.
“There is still some pain points with the consumer and they are still being cautious, which in Target’s case I do think it’s extremely justified going forward,” Jessica Ramirez, senior analyst at Jane Hali and Associates.
The company also said theft and organized crime could reduce this year’s profitability by more than $500 million compared to 2022.
First-quarter comparable sales also grew by a better-than-expected 0.7%, helped by a 0.9% increase in store traffic, but digital sales posted a surprise drop.
