By Ananya Mariam Rajesh
(Reuters) -Target cut its full-year sales and profit expectations even as its quarterly profit exceeded Wall Street estimates on Wednesday, benefiting from fewer discounts and better stocked store shelves.
The retailer's second-quarter sales, however, dropped 5%, partly due to the fallout of a backlash against its Pride merchandise in May.
Target was forced to remove some items from transgender designer Erik Carnell's Abprallen brand, citing an increase in customer-employee confrontations and incidents of Pride merchandise being thrown on the floor.
"As we navigate an ever-changing operating and social environment, we are applying what we learned," CEO Brian Cornell said, promising to be careful with its partnerships while "celebrating heritage moments."
Target did not provide the exact financial impact of the backlash, saying the incident cannot be separated from the rest of the macroeconomic pressure.
Company executives said sales were much softer in June as consumer spending remained strained, but improved through July.
"We are seeing food and beverage and household essentials absorbing a larger portion of the US consumers wallet," Cornell said.
BETTER THAN FEARED
Shares of the big box retailer, however, rose 6% in morning trading as inventories fell along with a 25% drop in discretionary items in its stock.
The company, which largely sells non-essential items like electronics and home decor, has been trying to balance its merchandise by adding more daily-use products as consumers limit their spending to necessary items amid rising prices.
"If you didn't have that political snafu, I guess alongside the inventory problem, the stock would be trading much, much higher," Dave Wagner, equity analyst and portfolio manager at Aptus Capital Advisors.
For the second half of the year, Target executives said, the company was taking a "cautious approach" even though consumer confidence was beginning to recover.
Target now expects annual comparable sales to decline in the mid-single digit range compared to its prior forecast of low-single digit decline to a low-single digit increase.
It expects 2023 adjusted profit per share between $7 to $8, compared with the prior range of $7.75 to $8.75.
On an adjusted basis, Target earned $1.80 per share in the quarter ended July 29, beating expectations of $1.39.
Bigger rival Walmart (NYSE:WMT) is set to report earnings on Thursday.