Target cuts profit outlook as shoppers look for deals, make fewer store trips

Target posted a drop in quarterly sales and lowered its full-year profit guidance on Wednesday as the big-box retailer saw choppy spending and shoppers hunting for value.

Despite its ongoing struggles, Target stuck by its sales guidance for the all-important holiday season, saying it expects sales to decline by a low single-digit percentage in the fourth quarter. It said it expects adjusted earnings per share for the year to come in between $7 and $8, lowering the high end of its previous range of $7 to $9. Much of its new range would come in lower than last year, when adjusted earnings per share were $8.86.

On a call with reporters, incoming CEO Michael Fiddelke declined to say when he thinks the company’s sales would turn positive again, but said Target is making progress.

“We are focused every day on making the right investments and the right decisions to get Target back to growth as quickly as possible,” he said. 

Fiddelke, who is Target’s chief operating officer and former chief financial officer, will step into the CEO role on Feb. 1. The company announced in August that he would succeed longtime CEO Brian Cornell.

He said Target will step up investment next year to try to turn around its stores and boost sales by increasing capital expenditures to $5 billion, a 25% year over year jump.

Here’s what Target reported for the three-month period that ended Nov. 1 compared with what Wall Street expected, based on a survey of analysts by LSEG:

• Earnings per share: $1.78 adjusted vs. $1.72 expected
• Revenue: $25.27 billion vs. $25.32 billion expected

Target’s sales have been roughly stagnant for four years as it faces stiffer competition and has grown weaker in some of the areas that set it apart in the past, including its eye-catching merchandise, its well-organized stores, and its friendly and helpful customer service. Some customers also boycotted the retailer after it rolled back key diversity, equity and inclusion programs, a dynamic that Target blamed in part in May for its weaker sales results.

Shares of the company have tumbled, too. As of Tuesday’s close, Target’s stock has fallen about 67% since the company’s all-time high in late 2021 and dropped about 35% so far this year. 

The stock was slightly lower in premarket trading Wednesday.

Fiddelke laid out three priorities on the day he was named Target’s next CEO: strengthening Target’s reputation as a retailer with stylish, well-designed merchandise, providing a more consistent shopping experience online and in stores, and using technology to move the business forward.

At the time, he said he wouldn’t wait to start making changes.

Last month, Target announced it would cut 1,800 corporate jobs — its largest layoff in a decade. It has taken steps to sharpen its merchandise and get back its fashion sense, including sending its designers to rodeos and ski lodges for inspiration. And it’s tweaked its online fulfillment strategy at stores to try to free up employees’ time to stock shelves and assist customers.

On a call with reporters about third-quarter results, Fiddelke pointed to a few other moves the company has made. He highlighted Target Trend Brain, a generative artificial intelligence-powered tool that helps the company’s designers and merchants identify what colors and styles are popular. It also is using synthetic audiences, AI models that simulate how real customers might respond to products or marketing campaigns, before launch.

Target on Wednesday announced another way it’s trying to rev up the business and adapt to new ways that people are shopping. It said in a news release that it is launching an experience with OpenAI, which allows customers to shop Target’s app within ChatGPT. It will launch next week in beta and allow users to purchase multiple items in a single transaction, shop for groceries and choose the way they want to get those purchases, such a curbside pickup.

Over time, Target shoppers will also be able to request personalized recommendations, the company said in the release.

Yet Target’s challenges in winning over shoppers persisted in the most recent quarter. 

Customers made fewer trips across Target’s stores and website and spent less during those visits. Traffic dropped by 2.2% and average transaction amount fell by 0.5% year over year.

Comparable sales, an industry metric that excludes one-time factors like store openings and closings, decreased 2.7%. Digital sales grew 2.4%, driven by more than 35% growth of same-day deliveries.

It marked the third consecutive quarter of declining comparable sales, which are also called same-store sales.

Target’s fiscal third-quarter net income dropped about 19% to $689, or $1.51 per share, from $854 million, or $1.85 per share, in the year-ago period. Revenue fell from $25.67 billion in the year-ago quarter. Excluding one-time costs such as severance packages, Target’s adjusted earnings per share was $1.78.

Digital sales increased 2.4% year over year, driven by more than 35% growth in same-day deliveries.

Fiddelke told reporters that Target saw “some volatility” in the quarter. Sales in both August and October were about flat as customers shopped for back-to-school and Halloween, but September sales fell about 4% year over year.

Chief Commercial Officer Rick Gomez said consumer behavior didn’t change from the previous quarter, with shoppers “stretching budgets and prioritizing value through spending where it matters most, especially in food, essentials and beauty.” 

Gomez and Fiddelke acknowledged other challenges specific to the third quarter, such as the pause of Supplemental Nutrition Assistance Program, or SNAP, benefits during the government shutdown. 

To capture the attention and dollars of lower-income shoppers, Target last week cut prices on 3,000 food and household products. Target has also set the price of some key holiday items so they feel like bargains, such as ornaments starting at $1, candles starting at $5 and throw blankets starting at $10, Gomez said.

Target is also trying to stand out with more products that customers can’t find elsewhere. It has 20,000 new items in its holiday assortment, more than double the year-ago holiday season, with over half of those only available at Target, Gomez said. In a bid to bring in customers beyond merchandise, it teamed up with Starbucks for an exclusive drink that shoppers can’t find elsewhere, a Frozen Peppermint Hot Chocolate frappuccino.

Target tends to see stronger sales during holidays and seasonal changes. Yet Gomez said even during those moments this year, customers have been selective. At Halloween, for example, Gomez said shoppers made “trade offs,” as the company saw stronger candy sales and weaker decor sales. 

Gomez said he expects that pattern to hold during the holiday season. 

“We think the consumer will prioritize what goes under the tree versus what goes on the tree,” he said.