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Target Earnings Beat a Positive, but Soft Guidance Raises Concerns

Published 05/17/2023, 02:34 PM
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Following a disappointing earnings report from Home Depot (NYSE:HD) on Tuesday, which analysts said was widely expected, investors were concerned that Target (NYSE:TGT) would also feel the heat from a more cautious U.S. consumer.

“The consumer is under pressure,” Chief Growth Officer Christina Hennington said on the call with analysts.

“The consistent inflation, the running out of savings as well as just economic uncertainty in general is having an impact on their choices and they’re making trade-offs.”

The Minnesota-based retailer reported a mixed set of Q1 results and guidance that missed the average analyst estimates as continued softness in discretionary categories continues to weigh on the top line.

How Did Target Perform in Q1?

Target reported a profit per share of $2.05 to easily top the average analyst estimate of $1.79. Total revenue was in-line at $25.3 billion while net income fell from $1.01 billion in Q1 2022 to $950 million.

Total comparable sales were flat in the first quarter, Target said, while analysts were hoping they would rise about 1%. Store comparable sales jumped 0.7% while analysts were expecting flat growth.

Even more concerning is that Target’s online sales were down 3.4% year-over-year, much worse than the expected 1.9% increase. As a result, the share of digital sales of the total sales generated fell by 70 basis points to 17.5%.

"We came into the year clear-eyed about the challenges consumers are facing, and we were determined to build on the trust we've established with our guests,” Brian Cornell, chair and CEO of Target Corporation, said in a press release.

Customer transactions rose 0.9% on top of the 3.9% that was reported for the year-ago period. The average transaction dropped 0.9% while analysts were expecting an increase of 0.2%.

The retailer said it operated 1,954 stores at the end of the quarter, an increase of 1.1% relative to last year’s comparable period. On a more positive note, inventory fell 16% YoY on the back of the 25% reduction in discretionary categories. This is likely to be seen as positive given investor concerns about elevated inventory in recent quarters.

Last August, Target shares fell after the company said its profit fell almost 90% due to an inventory clean-out. Surging inflation and a shift in consumer habits from spending on home improvement to travel and life experience weighed in on Target’s results in 2022.

“While there are many potential sources of inventory shrink, theft and organized retail crime are increasingly important drivers of the issue. We are making significant investments in strategies to prevent this from happening in our stores and protect our guests and our team,” Cornell added.

Overall, Target’s Q1 gross margin expanded by 60 bps to 26.3% but was still below the 26.5% expected. More positively, the operating margin came in at 5.2%, ahead of the 4.8% expected.

Target also said it didn’t complete any stock buybacks in Q1 given the softening demand. The previously authorized buyback program allows Target to buy back roughly $9.7 billion more of its stock.

Cautious Customer Environment Expected to Continue

Looking forward, CEO Cornell said Target expects this year’s profitability will fall by over $500 million relative to last year. The retailer sees adjusted EPS between $1.30 and $1.70, a wide miss compared to the expectations for a profit of $1.91 per share.

“We are maintaining our full-year financial guidance, based on the expected benefit from efficiency and cost-savings efforts and our team's continued focus on agility, flexibility and retail fundamentals in the face of continued challenges including inventory shrink,” Cornell further noted in the PR.

For the full year, the company sees adjusted EPS at $7.75-8.85 with the midpoint of this range falling short of the expected $8.29. Target also reaffirmed its full-year guidance for sales, which are seen falling in the low-single digits.

Comparable sales are seen ranging from a low-single-digit decline to a low-single-digit increase. The company said the guidance incorporates “softening sales trends in Q1.”

Goldman Sachs analysts reflected positively on Target’s Q1 earnings report. While Target shares were seen trading 1% higher in early Wednesday trading, analysts at the investment giant said they expect a positive reaction given that the results showed “a solid improvement in the operating margin and its inventory position.”

“That said, we acknowledge likely investor concerns related to the lower-than-expected 2Q guide and higher shrink, although we note FY23 guidance was reiterated," analysts told the bank’s clients in a note.

Summary

Target shares are trading modestly higher on Wednesday after the Minneapolis-based retail business reported it made progress to reduce swollen inventory. While Q1 results were mostly better than expected, the company’s soft guidance is also weighing on investor sentiment as they brace to hear from Walmart (NYSE:WMT) on the latest consumer trends.

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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

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