Target beats Q1 earnings expectations while warning on sales forecasts, retail thefts

Yahoo Finance's Brian Sozzi joins the Yahoo Finance Live show to break down Target Q1 earnings report, consumer shopping trends, and the impact of theft on retail companies.

Video Transcript

JULIE HYMAN: Target out with a beat on earnings in its latest quarter. However, its outlook missed the bull's eye. This comes amid continued softness in discretionary categories as consumers face elevated inflation and a sluggish economy. Joining us here to discuss, Yahoo Finance Executive Editor Brian Sozzi.

And you were on a call with the company last night where they talked about these numbers. So, as we look at the, sort of, throughline from Home Depot to Target, it does seem like there is this theme emerging of overall consumer softness.

BRIAN SOZZI: Yeah. I think you have to split this quarter in half from Target. So Target came out here, I would say posted its second consecutive comeback quarter, not exactly a great quarter for Target. Keep in mind, 2022, the story with Target is-- it was horrific earnings misses, bloated inventory.

It looks like they've gotten some of those things under control. Gross margins up year over year, check. Good. That's a good thing. Inventory down 16% year over year, guys. That is also a good thing. But something you flagged, Julie, there were a lot of negatives in this quarter.

First and foremost-- and I have not seen this from Target for a long time-- comparable sales of online, they were down 3.4% year over year. Last year at the same time, they were up over 3%. Sales marginally grew year over year. And you hopped-- I was on a call with other reporters, and on that call was Target CEO Brian Cornell and CFO Michael Fiddelke.

And they did deliver a story of a more cautious consumer, that they're in there buying essential goods, food, cosmetics, you name it, but then they might be leaving the store entirely and leaving all those home goods and apparel goods on the shelves. So cautious consumer. I think that the consumer has started cautiously shopping at Target to kick off the second quarter.

That is a tone we heard from Home Depot on its earnings call yesterday morning as well. So the overall mood, I think a cautious consumer to kick off the summer shopping season, which, bigger picture, I think calls into question on how the key back-to-school shopping season will start for Target and many other retailers.

BRAD SMITH: Yeah. And this was interesting too-- the operating income margin rate, 5.2% in 2023 compared with the 5.3% that they saw in 2022. Reason I bring that up, I know that in the conversations that you've had with the executives, and even what they've talked about in previous quarters, they're looking to get that figure back to 6%. And they weren't expecting that to really take place until later on in fiscal year 2024 at least.

I mean, is there anything to, kind of, read into there to say that there is perhaps a light at the end of the tunnel in getting to some of those margin targets as well?

BRIAN SOZZI: Well, that's-- I think you're essentially trying to maybe call up has the operating margin bottom for Target. And perhaps it has, in large part because they have got their-- gotten their inventory under control. Also, on that call with reporters, Cornell and Fiddelke talked about further cost-savings initiatives as the year went along.

Unclear what those initiatives are. It's unlikely Target is closing stores en masse to make an earnings number. But again, it sounds like a more efficient Target at a time where the consumer is under a lot of pressure. And then the second part of the story, of course, is I have never seen, I would say, a more cautious tone from Cornell on this issue of retail theft.

He started his earnings call-- or earnings statement, I should say, talking about a $500 million hit from retail theft this year. That is not something you normally see on a retail earnings release, and it's not something I'm used to hearing or just talking a lot to Target about it. But it looks to be an increasing problem, not just for Target, but a lot of other retailers.

JULIE HYMAN: Yeah, there are some big numbers attached to the overall retail industry about this. Did Cornell talk a lot about what they're-- what to do about an issue like this? Because it's not just-- we're not talking about, sort of, shoplifting, right? It sounds like it is organized theft that is going on at the stores, right?

BRIAN SOZZI: And I have more on this. There's a deeper dive story on the Yahoo Finance homepage discussing some of this, some great analysis, really a nice study from the National Retail Federation. I encourage everyone to check that out to really understand.

An issue, Julie, to your point, is not someone going into a dressing room with three shirts, putting two of them on and walking out with one, and then paying for that. That's not the issue. These are coordinated attacks on retail-- while chief among them smash-and-grabs. So large mobs go into retail stores, smash-- smash things that might be locked off-- mouthwash, home goods, you name it.

They go in there, take things in mass quantity, and run out the store. And then, also, a lot of just, I think, theft happening on the docks as well, which is, I think, a story that has gone underreported as well. But it all takes money or takes a bite out of Target.

And this year, it will be a $500 million profit hit. Over two years, Target is calling out a potential $1.2 billion hit to profits-- that's last year and then this year-- from retail theft alone. That is huge. And I didn't get the sense from Cornell and Fiddelke on this call with reporters that they're able to address it. How do you-- are you going to put more-- hire 75 more people in each store to try to-- I don't know-- fend off a flash mob of people looking for 30 cases of mouthwash?

Unclear. They have no issue. It's hard to figure out how they're going to do this.

JULIE HYMAN: One more thing on Target as we, sort of, put a pin in the conversation for now-- they didn't change their forecast for the full year, all of these headwinds aside, headwinds in this quarter, and I think that's why the stock is not performing worse. Because even though the second quarter sounds like it's going to be rough, maybe things will improve to some extent in the remainder of the year.

But we're going to talk to an analyst about this later. Corey Tarlowe from Jefferies is going to be joining us to dig into these numbers a little bit more.

BRIAN SOZZI: Real quickly, I asked Brian what would have to happen to the economy to hit that low end of the guidance. He didn't really say what those things would be to struck an upbeat tone. But I think this is Target reaffirming their guidance for two reasons-- they're betting on a big back-to-school shopping season and an even bigger holiday season, which is a tall order given where the consumer is in this country.

BRAD SMITH: Yeah. All right. Maintaining their full-year guidance for right now, at least based on some expected benefit from efficiency and cost-saving efforts, as you mentioned. Our own Brian Sozzi joining us to break down all things TGT.