Target's turnaround has begun

After years of slumping sales, Target finally hit the earnings bullseye. The retailer reported a 5.6% jump in comparable store sales in Q1—triple what Wall Street was anticipating, and the first positive gain in five quarters straight.

The struggling retail chain surpassed forecasts on both the top and bottom lines, thanks to its secret weapon: cheap trinkets like toys under $10, and buzzy brand collabs with Roller Rabbit, whose exclusive prints and blind boxes generated roughly $6 million in sales in their first hour alone. Even grander plans are slated for Q2, including the debut of Target Beauty Studios in 600 stores, an overhaul of home decor accessories, and the biggest food and beverage makeover in more than a decade, featuring zingers like mushroom coffee.

Target also raised its full-year guidance, boosting year over year expected net sales growth from 2% to 4%, and pushing EPS to the high end of its previous forecast range of $7.50 to $8.50.

“We’re encouraged to see a strong guest response so far,” reported CEO Michael Fiddelke, who took the helm in March. Still, he’s not running a victory lap down store aisles just yet: “Despite our updated guidance, we’re maintaining a cautious outlook given the work we know we have in front of us and ongoing uncertainty in the macroeconomic environment.”

Shoppers vs. shareholders

Target may be winning over shoppers, but shareholders not so much.

The stock dropped 3.84% today, due to concerns over rising marketing, operations, and compensation costs. Plus, as CFO Jim Lee pointed out, part of the reason this quarter’s numbers look so good is because they were so bad last year, which won’t be as easy to keep up going forward.

Another stormcloud gathering on the horizon is consumer sentiment, which fell to a new record low in May amid surging inflation and soaring gas prices. How much longer will shoppers be eager to indulge in retail therapy if it costs twenty bucks to drive to the mall?

Consumer spending fuels two-thirds of the country’s GDP, making it the closest thing we have to a real-time pulse check on how Americans feel about their jobs, their savings, and what they think is coming next. In this sense, Target’s comeback story isn’t just about a struggling store. It’s a canary in the coal mine to a bigger question: Are we all okay?

We’ll get an even clearer answer once Walmart reports earnings tomorrow.—JD