Wednesday, February 28, 2024

Target Earnings: Can the Retailer Rebound Ahead of the Holidays?

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Target Earnings: Can the Retailer Rebound Ahead of the Holidays?

Target is set to report its fiscal third quarter earnings on Wednesday, November 16 before the stock market opens. The retail giant has faced numerous challenges in 2022, with slowing sales, rising costs, and supply chain hurdles weighing on performance.

Investors will be closely watching Target’s Q3 results for signs that the company can reaccelerate growth heading into the all-important holiday shopping season. Overall, Wall Street analysts expect Target to report declining profits and revenues versus last year, reflecting the difficult operating environment.

However, Target’s guidance and commentary around holiday sales trends will be even more important for investors. The retailer cut its full-year outlook back in August amid a pronounced consumer spending pullback. But optimism is growing that inflation may have peaked, which could reinvigorate shopper demand.

Key Metrics to Watch in Target’s Q3 Earnings

According to consensus estimates compiled by LSEG , formerly known as Refinitiv, analysts expect Target to report the following results for Q3 2022:

  • Earnings per share (EPS): $1.48 expected, down nearly 50% versus $3.03 in Q3 2021
  • Revenue: $25.24 billion expected, a 0.1% drop compared to $25.29 billion last year

Target’s profitability has declined sharply this year as supply chain costs and markdowns eat into margins. However, the top-line growth outlook remains relatively stable despite the inflationary environment.

Comparable sales, a crucial metric that tracks revenue at stores open at least one year, is another important indicator to monitor. Target reported a Q2 comp sales decline of 2.6%, with traffic falling 2.7%. Investors will want to see sequential improvement on this front.

Guidance in Focus

While backward-looking Q3 results matter, Target’s guidance for the fourth quarter and holiday season may prove even more consequential.

In August, management slashed its full-year EPS view to a range of $7.00 to $8.00, down from prior guidance of $9.00 to $9.90. The company also expects a mid-single digit percentage drop in full-year comparable sales.

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If Target issues a gloomy holiday quarter outlook, shares could come under renewed pressure. But if executives project a bounce back in Q4, it would spark hopes that consumers are ready to spend again.

Consumers Squeezed by Inflation Weigh on Target

Target has blamed its recent struggles largely on rapidly shifting consumer behavior in the face of soaring inflation. Surging prices for essentials like food and gas have forced households to pull back on discretionary categories that make up a hefty portion of Target’s merchandise mix.

The company gets approximately one-third of its sales from discretionary categories like apparel, home furnishings, electronics, toys, and beauty products. With the consumer price index rising 8.2% in September, shoppers have far less leftover cash to splurge on non-essentials.

Target Chairman and CEO Brian Cornell said on a CNBC interview that comparable sales have declined for seven straight quarters on both a dollar and unit basis. Cornell added that guests are also buying fewer groceries and household essentials, a very concerning trend for Target.

The pullback has shown up on Target’s income statement. Gross margins fell from 30.4% in Q2 2021 to just 25.7% in Q2 2022 as the company cut prices to move inventory. Target held more than $15 billion in excess inventory at the end of Q2, nearly 50% above year-ago levels.

Heavy discounting has weighed on profitability but allowed Target to make progress in right-sizing inventory amid changing consumer patterns. Investors will want to hear that unsold merchandise continues moving in Q3.

Can Target Stage a Turnaround for the Holidays?

While 2022 has proved challenging, Cornell expressed optimism that Target could rebound during the holiday season. He noted sales have picked up around seasonal events like Halloween and Mother’s Day this year.

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The holiday shopping season represents a massive opportunity, with November and December delivering nearly one-fifth of Target’s full-year sales. Target’s inventory investments earlier in 2022 were made with the holidays in mind.

There are also glimmers of hope that the inflation wave has crested. The October CPI report showed prices rising just 7.7% annually versus 8.2% in September on a headline basis. Core inflation, which excludes food and energy, rose just 0.3% month-over-month – the lowest increase since September 2021.

Moderating price increases, combined with resilient job growth and savings, could drive consumers back to stores during the holidays. Target is ramping up promotions to capture pent-up demand for gifts and celebrations.

If management expresses confidence in a holiday rebound during the Q3 earnings call, it may reassure investors after months of sliding sales.

Key Factors to Watch Moving Forward

Beyond the holiday season, Target still faces an uphill battle to reignite growth in 2023 and beyond. Several key factors could determine if Target can bounce back or continues struggling:

  • Inflation trajectory – if prices keep rising rapidly, consumers will likely maintain thrifty habits. But if inflation slows toward the Fed’s 2% target, shoppers may spend more freely.
  • Consumer savings – U.S. households built up nearly $2.5 trillion in excess savings during the pandemic, giving them a buffer against inflation. But if savings are exhausted, spending could drop further.
  • Labor market – unemployment remains near 50-year lows and wages are rising steadily. A recession and job losses could severely dampen discretionary shopping.
  • Higher interest rates – the Fed’s rate hikes aim to slow the economy and curb inflation but may go too far and trigger a downturn. Higher borrowing costs could impact Target’s performance.
  • Ongoing supply chain issues – improved, but still strained supply chains have driven up costs and constrained inventory. Any reversal would squeeze profits further.
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The coming quarters will test Target’s pricing power, brand loyalty, and inventory management. How the company navigates the challenging economic conditions could determine its long-term success.

Target Remains a Retail Bellwether

Despite its struggles in 2022, Target remains a retail sector bellwether and barometer of broader consumer health. The company operates nearly 2,000 stores across the U.S. along with a rapidly growing e-commerce division.

Target is also investing billions to elevate the shopping experience, remodel stores, and boost fulfillment capabilities. If the company can ride out the near-term economic storm, it remains well-positioned for the long haul.

But the path forward is paved with uncertainty. Target’s Q3 earnings will provide critical insight into whether consumers – the engine of the U.S. economy – are getting their wheels back ahead of the holidays.

For investors, the report will show if Target’s stock price, down nearly 30% year-to-date, reflects the hardest times or only signals more pain ahead. Either way, Target’s results will set the stage for how the retail industry finishes 2022 and starts the new year.

In summary, Target is set to announce Q3 2022 earnings on November 16 before market open. The report comes after the retailer cut guidance in August amid slowing sales, margins pressures, and excess inventory. Investors will watch for signs Target can reinvigorate growth during the crucial holiday season. While the consumer spending outlook remains challenging, moderating inflation offers a glimmer of hope. Target’s results will provide key clues about discretionary shopping trends and the health of the U.S. consumer heading into the end of 2022.

Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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