‘This was the definition of a mixed report,’ analyst says
Target Corp.’s stock rose 5% Wednesday, after the retailer beat profit estimates for the second quarter by a wide margin, offsetting a revenue miss and lowered guidance.
Trading volume of more than 9.4 million shares less than an hour into Wednesday’s session was well above the 379,152 daily average for the past three months.
Analysts said the numbers looked good amid subdued expectations.
“We had heard that [Target] was protecting its profit despite the precipitous drop in traffic and sales, and these results bear that out,” Bernstein analyst Dean Rosenblum said in a note to clients. “Expectations coming into the quarter were very low, and the market seems to have been caught by surprise by the beat on the bottom-line.”
The company TGT, +2.96% had net income of $835 million, or $1.80 a share, up from $183 million, or 39 cents a share, in the year-earlier period. Adjusted per-share earnings also came to $1.80, well ahead of the $1.43 FactSet consensus.
Revenue fell 5% to $24.773 billion from $26.037 billion a year ago, below the $25.178 billion FactSet consensus. Same-store sales fell 5.4%, while FactSet was expecting a decline of 3.7%.
The company said the profit rise — adjusted EPS was more than four times higher than a year ago and above its own guidance — reflected “a meaningful” recovery from last year’s inventory actions.
Retailers were hurt last year by supply-chain issues and inflation-weary customers who held off buying discretionary items, making it hard to clear inventories without resorting to big discounts.
Target said this quarter continued growth in frequency businesses, which it defined as essentials and beauty and food and beverages, partially offset by declines in discretionary categories.
Inventory at quarter-end was 17% below the year-earlier period, due to a 25% reduction in discretionary items, which was partially offset by investments to bolster frequency categories and long-term market share opportunities.
“With the benefit of a much-leaner inventory position than a year ago, the team was able to quickly respond to rapidly-changing topline trends throughout the second quarter, while continuing to focus on the guest experience,” Chief Executive Brian Cornell said in a statement.
On a call with analysts, Cornell acknowledged the backlash Target suffered this year over its Pride-themed products, which it has been offering for more than a decade.
The company had to make changes to protect workers amid the intense anti-LGBTQ protests. After the launch “members of our team experienced threats and aggressive actions” Cornell said. So, to protect the team “we quickly made changes” the CEO added.
Target will continue to support these moments in the future, he said.
The company’s second-quarter gross margin was 27%, up from 21.5% in 2022, reflecting lower markdowns, lower freight costs, retail price increases and lower supply chain and digital fulfillment costs.
But Target lowered its full-year sales guidance to reflect recent soft sales trends and said it now expects a wide range around a mid-single-digit decline for the rest of the year. It expects adjusted EPS of $7.00 to $8.00, compared with prior guidance of $7.75 to $8.75. The FactSet consensus is for EPS of $7.72.
For the third quarter, Target said it is expecting same-store sales to be down in that same range and for adjusted EPS of $1.20 to $1.60. The FactSet consensus is for EPS of $1.82.
Kelly Bania at BMO Capital Markets said the 553 basis point improvement in gross margin was a solid beat and that Target is prioritizing profitability as its traffic weakens. BMO has a market perform rating on the stock.
But CFRA analyst Arun Sundaram was more cautious.
“This was the definition of mixed results,” he wrote in commentary.
“We saw a huge bottom-line beat, but sales fell well below expectations and the company slashed guidance for the year. The guidance cut was somewhat expected given the Pride merchandise backlash, along with various headwinds on consumer discretionary spending in the back half of the year (e.g., federal student loan repayments, higher interest rates, less excess savings, elevated inflation),” he wrote.
Bulls will like strong gross margins and disciplined cost management, but bears will focus on deteriorating sales trends and operating deleverage.
“With comp sales now in negative territory, we will likely see more operating deleverage in the coming quarters. Given the weaker sales trends, particularly within higher-margin discretionary goods, we think it is unlikely Target will return to its historical 6%+ operating margin over the next few years,” he said.
Roth MKM analyst Bill Kirk. who has a neutral rating on the stock, took a similar view.
“Competitors continue to grow, and consumer habits are being reformed,” he wrote in a note. “Absent consumer/competition shifts, a return to comparable-store sales growth is uncertain.”
Target’s stock has fallen 13% in the year to date, while the S&P 500 SPX has gained 16%.