Q1 Results: Walmart, Target Lean on Groceries as Discretionary Spending Declines in Early 2023

Walmart and Target both navigated the uncertain currents of first fiscal quarter of 2023, but their differing results point to still more turmoil ahead. Walmart reported a 7.6% sales increase for its Q1 2024, which ended April 30, and raised its full-year guidance to 3.5% in response. Target saw just 0.5% sales growth for its Q1 2023, which ended April 29, leading it to maintain its projection of a low-single digit sales decline for the year.

Walmart’s comparable sales growth was likewise strong, at 7.4%, while its ecommerce sales growth of 27% was led by pickup and delivery options. The company’s investments in advertising also are paying off, and Walmart Connect grew nearly 40% during the quarter.

Additionally, groceries have become a majority of Walmart’s annual sales, at 60%. This has been a significant benefit to the retailer — 88% of shoppers are cooking at home more to save money compared to a year ago, according to data from Bazaarvoice, and this need for groceries helped offset a mid-single-digit decline in general merchandise.

However, groceries also bring smaller margins compared to other items. This led to a gross margin rate of 23.7%, down from 23.8% in Q1 2023. Additionally, shoppers reportedly have been trading down to smaller sizes, making fewer discretionary purchases and waiting for discounts on expensive purchases like TVs, according to CNBC.

“We’re seeing in these economic indicators that there is some strain on the consumer, but the resilience has surprised us,” said John David Rainey, CFO at Walmart in an interview with CNBC. “And I think that’s in part probably because balance sheets are much stronger than they were pre-pandemic, even at this point.”

Sam’s Club also saw strong results, with sales up 7% year-over-year, likewise driven by strength in grocery. Ecommerce sales were up 19%, led by curbside pickup.

Target Fights Rising Shrink

Target faced similar pressures to Walmart, with its shoppers making fewer discretionary purchases but showing greater interest in groceries in the first months of the year. Comparable digital sales fell 3.4% overall, but omnichannel offerings helped offset this decline: same-day services saw unspecified mid-single-digit growth, led by high-single-digit growth in Drive-Up orders, and more than 97% of sales were fulfilled by stores.

One area where Target made significant progress was cutting back on excess merchandise. Inventory at the end of Q1 was 16% lower than in Q1 2022, reflecting a more than 25% reduction in discretionary categories. Efforts to lower stock levels were somewhat offset by investments made to “support rapidly-growing frequency categories, and strategic investments to support long-term market-share opportunities.”

One major challenge Target highlighted for the coming months was shrink. The company expects these losses to weigh on full-year results by more than $500 million compared to 2022.

“While there are many potential sources of inventory shrink, theft and organized retail crime are increasingly important drivers of the issue,” said Brian Cornell, CEO of Target in a statement. “We are making significant investments in strategies to prevent this from happening in our stores and protect our guests and our team. We’re also focused on managing the financial impact on our business so we can continue to keep our stores open, knowing they create local jobs and offer convenient access to essentials.”

Target also reported a slowdown during the latter part of the quarter. Total sales were strongest in February, began decelerating in March and softened further near the end of April, according to Christina Hennington, EVP and Chief Growth Officer at Target. However, she was confident that the company would weather the coming challenges.

“American consumers continue to face difficult trade-off decisions as they juggle the wants and needs of their families,” said Hennington during a call with investors. “Consumers’ saving rates are down, and while inflation rates are finally declining, so is consumer confidence. The fear of a looming recession weighs heavily on many American families, and though discretionary spending remains soft, our guests are still looking to sprinkle some affordable joy into their regular shopping at Target.”