Target
lowered its fiscal-year financial guidance and reported less revenue than anticipated.
But the stock was rallying Wednesday because the company reported higher-than-expected earnings and improved margins, effectively delivering a better quarter than feared.
Shares of Target (ticker: TGT) closed 3% higher at $128.75 on Wednesday, largely because expectations were low heading into the report.
Earnings were $1.80 a share, compared with expectations for $1.43.
Sales fell 4.9% in the second quarter from a year earlier to $24.8 billion, missing analysts’ estimates for $25.2 billion. Comparable-store sales dropped 5.4%.
Weak sales prompted the company to lower guidance for the rest of the year. It now sees full-year profit of between $7 and $8 a share compared with an earlier estimate of $7.75 to $8.75. For the third quarter, Target sees adjusted earnings per share ranging between $1.20 and $1.60, below estimates for $1.82.
“Given the current consumer and economic backdrop, we’ve adjusted out guidance for the remainder of the year, consistent with a cautious planning approach that has served us so well during the first half of the year,” said Chief Executive Brian Cornell in a call with investors Wednesday.
“We overall view TGT’s Q2:23 results as clearly better than the extremely negative sentiment toward the story lately,” wrote Oppenheimer analyst Rupesh Parikh, adding that he expects the relief will prompt the stock to rally on Wednesday.
Indeed, there were a couple of bright spots in the report. The earnings beat was one, and the guidance cut was less steep than feared, analysts say. Inventory levels were leaner this quarter, down 17% compared with last year.
The company’s gross margin rate improved to 27%, up from 21.5% in the year-ago quarter, even though it came under pressure from increased inventory losses due to shrink, the industry term for merchandise lost through theft, damage, and administrative errors. Shrink has become a growing concern among retailers because retail theft is on the rise.
On Wednesday, Target said those loss levels may soon be “reaching a plateau,” but aren’t declining yet. Theft incidents involving violence or threats of violence at Target’s stores increased 120% from a year earlier in the first five months of the year, the company said.
“We expect shares to react positively to the margin upside, given that sentiment was very bearish into the event, with Street numbers coming down significantly during the quarter,” wrote KeyBanc Capital Markets analyst Bradley Thomas in a note to clients. “Looking ahead, we believe investors will be most focused on the top-line challenges, which could continue into 2024, and TGT’s ability to sustain or improve margins.”
A rally would be welcomed by investors. Shares of Target are down 15% this year, shedding more than 20% of their value in the past three months alone. The stock price has been battered by concerns over slowing sales this past year, and recent backlash over its Pride month collection.
The stock nosedived in May following Target’s first-quarter earnings report because the company issued second-quarter guidance that was below Street expectations. That spurred a nine-day losing streak, exacerbated by Target’s decision to change or remove certain products from its yearly Pride collection in response to backlash from some of its customers.
The Pride controversy reached beyond Target’s stock price, dragging down sales and foot traffic, management said. Foot traffic was down 4.8% in the quarter, compared with up 0.9% a year ago.
The economic environment also hurt Target’s results. With inflation and interest rates still high, consumers are spending less on discretionary purchases, such as home furnishings and electronics—Target’s forte—and spending more on food, necessities, and experiences, Target’s management team said.
Target doesn’t see a significant change in consumer spending patterns in the months ahead.
“As we assess the economic and industry backdrop, we continue to see a mixed picture,” said Michael Fiddelke, Target’s chief financial officer.
On a positive note, consumer spending and employment levels have been resilient, and consumer confidence is improving, Fiddelke said. The company is also pleased with preliminary results from the back-to-school season, which is the company’s second-biggest period for spending after the end-of year-holidays.
On the flip side, high inflation and the rollback of government stimulus— including the enhanced child care tax credits and the suspension of student loan payments—“presents an ongoing headwind that consumers continue to manage,” Cornell added.
Until consumers show sustainable interest in these discretionary categories, it will be difficult for Target to increase its sales, wrote J.P. Morgan analyst Christopher Horvers in a note to clients ahead of the earnings report.
While the near-term prospects for Target still seem bleak, some analysts, including Oppenheimer’s Parikh, still believe the company is well positioned for the long run.
Write to Sabrina Escobar at [email protected]
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