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Target sales fall in the second quarter and it lowers the outlook for the year, citing inflation and a culture war

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

The Minneapolis retailer expects high interest rates, making credit cards more expensive to use, and higher food prices will continue to put pressure on customers. On Wednesday, the chain lowered its profit and sales expectations for the year. In lowering its forecast, Target also cited the end of the student loan moratorium, which had given one-time students some more financial breathing space.

Earnings came in better than expected, however, as the Minneapolis chain moved inventories closer to cautious spending on customer discretionary items.

Target is one of the first major US retailers to report quarterly financial results, and the impact of rising prices and heightened interest on its customers will receive significant attention ahead of a series of quarterly reports from companies such as Walmart and other retailers.

CEO Brian Cornell said higher high prices for food and household essentials are taking away more of the paychecks from customers who have also withdrawn from buying some goods in favor of traveling or spending time away from home in other ways.

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“Guests are at concerts,” Cornell said. “They’re going to the movies. They’ve seen “Barbie.” They enjoy those experiential moments and they shop very carefully for discretionary goods.”

Other retailers see the same thing.

Home Depot, the nation’s largest home improvement retailer, reported second-quarter results Tuesday that beat earnings and sales expectations, but sales continued to fall. The company said it sees weak sales in certain big-ticket items such as patio furniture and appliances, noting that customers are still spending money on smaller home improvement projects.

Walmart, the largest retailer in the country, will announce the results on Thursday. Macy’s, Kohl’s and Nordstrom will publish quarterly results later this month.

The reports follow the government’s latest snapshot on retail sales that showed Americans increased their spending on clothing, dining out and online goods last month – a sign that solid consumer spending is still driving the resilient US economy.

But Target was also hit with another problem: It was one of the companies hit by a backlash for its LGBTQ+ support, particularly are displays of Pride Month merchandise. It pulled some items and made other changes after hostility from some customers who confronted workers and toppled displays. Company executives told reporters on the phone call that it couldn’t tease how much the negative reaction had on its company, but once it made the changes, those incidents subsided. Total sales improved in July compared to June.

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Cornell said the company has learned from the backlash and said it will be more thoughtful in offering merchandise for its heritage months, which celebrate different ethnic and marginalized groups.

Target’s latest earnings report shows the challenges it faces in tracking customer behavior.

Target said it earned $835 million, or $1.80 per share, in the quarter ending July 29. That compares to $183 million, or 39 cents per share, in the same period a year ago.

Sales fell nearly 5% to $24.77 billion from $26.04 billion as shoppers focused more on grocery and beauty products rather than discretionary items. Business in the quarter was also hurt as the results were compared to heavy discounts in the prior year period that were designed to clear out unwanted inventory.

Analysts were expecting $1.43 per share on revenue of $25.18 billion, according to FactSet.

Inventory at the end of the second quarter was 17% lower than last year, reflecting a 25% reduction in discretionary categories such as fashion and home furnishings.

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Comparable sales – those from stores or digital channels active in the last 12 months – fell 5.4% in the last quarter. Turnover remained unchanged in the first quarter.

Target now expects comparable sales in a broad range around a mid-single-digit decline for the rest of the year. It also now projects full-year adjusted earnings per share of $7 to $8, compared to 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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