Sales decline as consumers cut back on grocery and home goods purchases

• Its sales decreased by approximately 3% year over year, resulting in Target's first-quarter earnings falling short of expectations.
• Consumers purchased fewer everyday items such as groceries and paper towels while also buying more discretionary goods like clothing and home decor.
• Discretionary categories are still experiencing soft trends, as stated by CEO Brian Cornell.

On Wednesday, the company posted a year-over-year sales decline and missed Wall Street's earnings estimates, as consumers fatigued from high prices bought both fewer discretionary items and groceries.

The discounter's revenue in Minneapolis was in line with expectations, according to CEO Brian Cornell, who stated that the company's results reflect continued soft trends in discretionary categories.

The company aims to ensure that it provides value to its customers and clearly communicates this through its relaunched loyalty program. Additionally, Target announced on Monday that it would be reducing prices on various everyday items, including milk, bread, paper towels, and diapers.

Target maintained its full-year sales forecast, predicting comparable sales to be flat to up 2%, and adjusted earnings per share to be between $8.60 and $9.60.

According to LSEG's survey of analysts, Target's three-month performance from May 4 exceeded Wall Street's expectations for the period.

• Earnings per share: $2.03 vs. $2.06 expected

• Revenue: $24.53 billion vs. $24.52 billion expected

It marked the first time since November 2022 that Target missed earnings expectations.

In the year-ago quarter, Target's net income was $950 million, or $2.05 per share, but in the latest quarter, it fell by less than 1% to $942 million, or $2.03 per share.

In the previous year, total revenue was $25.32 billion, and it decreased by approximately 3%.

Target, like other retailers, has attempted to attract consumers who are cutting back on spending on clothing, home goods, and other discretionary items. The retailer has been particularly affected by this trend because it generates less revenue from food sales than its competitor Walmart, which derives approximately 60% of its U.S. sales from groceries, compared to roughly 20% at Target.

The consumer price index, which measures the cost of goods and services at the cash register, rose by 3.4% on a year-over-year basis in April, although inflation cooled slightly.

Target acknowledged that challenge with this week's price cuts.

The company faces competition from other discounters, such as Walmart, Aldi, and Lidl, who are targeting bargain-hunting customers.

Recently, Walmart has gained market share from higher-income shoppers and introduced a premium food brand with most items under $5. Additionally, the company's CFO John David Rainey stated last week that customers are turning to its grocery aisles for cheaper meals due to the rising prices of fast food.

Target's sales challenges

In the first quarter, both online and store customer traffic at Target decreased by 1.9%, and the average amount spent per visit also decreased by 1.9%.

Digital sales saw a 1.4% increase, ending a year-long decline.

The decline in comparable sales, or same-store sales, was 3.7%, with shoppers purchasing more beauty items but fewer discretionary categories like apparel and home, as predicted by analysts, according to StreetAccount.

Sales in frequency categories, including food and beverage and beauty and household essentials, declined by low-single digits, according to Chief Growth Officer Christina Hennington during a call with reporters.

Target reported a 4 percentage point increase in apparel sales from the fiscal fourth quarter, indicating positive trends compared to recent quarters.

The limited-time collection with Diane Von Furstenberg on Target's website attracted millions of unique visitors during the launch week and increased the average size of customers' baskets by 15%.

In addition to the unique items, she stated that Target's spending was also driven by its partnership with tennis and lifestyle brand Prince to sell pickleball gear and Taylor Swift's latest album, which the company capitalized on with in-store events and photo ops.

On Tuesday, Target's shares closed at $155.78, giving it a market value of $72.07 billion. Despite a nearly 12% increase in the S&P 500 this year, Target's shares have only risen about 9%.

– CNBC's Robert Hum contributed to this report