HWhat is the strength of the consumer? That’s what investors are asking before deciding to buy shares of Target (TGT), which plunged about 25% in a single day after the company last reported results.
As with rival Walmart (WMT), which slashed its earnings forecast a few weeks ago — something Walmart has done for the second time in a row — Target is seeing a rapid shift in how consumers spend amid rising of inflation. Can Target successfully manage this pressure and move its profit margins in the right direction in the quarters ahead? That’s one of the main questions analysts will be focusing on when the company reports second-quarter fiscal 2022 results before the opening bell on Wednesday.
In addition to inflationary pressures and excess inventory, Target suffered from declining operating profit as well as earnings per share. The inventory issue was a misfire, albeit a well-meaning one. In order to alleviate supply chain issues, the company ordered more goods than needed. When those items didn’t sell, Target was forced to aggressively discount them so they could move, resulting in lower margins or outright losses.
As a result, analysts slashed the company’s earnings estimates, which was also reflected in the stock price which fell 50% from its 52-week high of around $268. The stock is now down 37% from a year ago, trailing the S&P 500 index’s 7% decline. But the company has taken steps to address these operating issues, including plans to reduce freight and transportation costs. It will need strong results in terms of turnover and earnings and upward trends to regain investor confidence.
For the three months ending in July, Wall Street expects the Minnesota-based retailer to earn 72 cents per share on revenue of $26.1 billion. That compares to the year-ago quarter where earnings were $3.64 per share on revenue of $25.16 billion. For the full year, ending in December, earnings are expected to fall 36% to $8.65 per share, while revenue of $109.87 billion will rise 3.6% year over year. other.
While overall revenue appears to be strong, as evidenced by the fact that full-year revenue is expected to grow further, the company is suffering from weaker demand in higher margin categories due to the rise in inflation. As noted above, the starting strategy in the first quarter was aggressive markdowns to move excess inventory. The byproduct of this has been the erosion of margins. Given that inflation had not been significantly reduced over the past three months, it would not be surprising to see a repeat of this trend in the quarter just ended.
In the first quarter, the company reported adjusted EPS of $2.19, which missed Street’s estimate by 87 cents, although revenue rose 4% to $25.17 billion, above forecast of $690 million. First quarter operating margin was just 5.3%. Not only was this lower than the company’s forecast, it was well below analysts’ double-digit estimates. First quarter same-store sales increased 3.3%, driven by a 4% increase in customer traffic. The company recently forecast profitability to fall to just 2% of revenue in the just-ended second quarter.
The drop in profitability means the company expects to be even more aggressive in its refreshes this quarter. This will come as no surprise given that this has been the biggest pressure on the stock price. The question will be whether Target can return to growth in the third quarter and into the holiday shopping season? For the stock to rebound, Target needs to improve each of its growth metrics and demonstrate how it plans to get its profit margins back in the right direction.
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