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July, 15

Target: Why Investors Are Optimistic Despite Weak Sales

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Despite the fact that Target Corporation (NYSE:) cut its adjusted earnings per share forecast for the full year, the retailer’s stock still surged more than 6% in early Wednesday trade.

Analysts were widely expecting a guidance cut from Target on expectations that Pride Month backlash will hurt second-quarter numbers. Judging by the market’s reaction, it seems that the traders were positioned for a bigger guide lower.

Better Than Feared Results and Guidance

Target now sees adjusted EPS between $7.00 and $8.00, lower than the prior forecast for $7.75-8.75 in adjusted profit per share. The consensus stood at $7.81. For this quarter, the company expects to report EPS of $1.40 (up or down 20 cents), which is below the expected $1.83. Comparable sales are seen “in a wide range around a mid-single digit decline for the remainder of the year” as well as for the third quarter. Comparable sales fell 7% in June and 5% in July.

Still, shares rose after Target said it earned $1.80 in adjusted EPS for its , easily ahead of the consensus of $1.40. The profit upside came in despite the fact that the company generated $24.38 billion in Q2 sales, a 4.9% decrease compared to the prior year. Analysts were looking for $24.91 billion.

“Our second quarter financial results clearly demonstrate the agility of our team and the resilience of our business model, as we saw better-than-expected profitability in the face of softer-than-expected sales, Brian Cornell, chair and chief executive of Target Corporation, said.

“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.”

Comparable sales fell 5.4% after rising 2.6% the last year, a worse-than-expected decline given the 3.8% expected decline. On a more positive note, the gross margin expanded by 550 basis points YoY to 27%, easily clearing the consensus of 25.6%. The operating margin was 4.8% vs. 3.8% expected.

Target said that customer transactions fell 4.8% YoY with the average transaction amount falling 0.7% as consumers feel the effects of higher interest rates. Still, this was better than the expected drop of 2.5% in the average transaction amount.

Inventory at the end of Q2 was 17% lower than last year, Target said, which is “reflecting a 25 percent reduction in discretionary categories, partially offset by inventory investments to support frequency categories, and strategic investments to support long-term market-share opportunities”

The retail giant operated 1,955 stores at the end of the second quarter.

Target stock received another boost when Cornell said on the subsequent earnings call that he’s “very pleased” with sales in August so far.

Stronger Retail Sales Prompt Market Selloff

Retail sales turned in stronger-than-expected in July despite slowing inflation, according to Tuesday’s report released by the U.S. Commerce Department. The advanced retail sales showed a 0.7% jump in July, nearly double the 0.4% analyst estimate. When autos are excluded, sales jumped as much as 1% while the consensus was also looking for a 0.4% increase. Both prints showed the biggest monthly gain in 6 months.

Online retailers witnessed a 1.9% increase in spending, followed by a 1.5% and 1.4% jump in spending on sporting goods and food services & drinking places, respectively. Gas station sales were up 0.4%. These gains offset the 1.8% drop in furniture sales while electronics and appliance stores witnessed a 1.3% decrease.

The stronger-than-expected retail sales report for July has fueled optimism that the Federal Reserve may manage to navigate a soft landing for the U.S. economy, despite interest rates exceeding 5%.

“Despite the additional pressure put on the Fed, Americans’ sustained ability to spend speaks to the strength of the US economy in the face of global economic challenges,” said Mike Loewengart.

Still, stocks fell on Tuesday as investors are becoming increasingly more nervous about the Fed delaying rate cuts to the second half of 2024 on the back of the still-strong U.S. economy. According to FactSet data, the market is now pricing in fewer rate cuts in 2024 than it did a month ago.

“There’s a point at which better-than-expected doesn’t mean good value for the future,” said Erik Ristuben, chief investment strategist at Russell Investments.

Moreover, the Fed may be looking to deliver another 25-bps rate hike before the end of the year if inflation proves to be falling slower than expected.

Speaking on the earnings call, Target’s CFO Michael Fiddelke said the retailer is seeing lower inflation in food and essentials.

Stocks are also under pressure amid weak economic data from China, which prompted the country’s central bank to cut two benchmark lending rates on Tuesday. On the other hand, the yuan fell to its lowest level in a year.

The latest batch of soft economic data from China has prompted some analysts to signal that the country’s GDP growth may come in below 5%.

“In our view, Beijing should play the role of lender of last resort to support some major developers and financial institutions in trouble, and should play the role of spender of last resort to boost aggregate demand,” Nomura’s Chief China Economist Ting Lu said in a report Tuesday.

Summary

Target shares were seen higher on Wednesday after the retailer reported better-than-expected profit numbers for the second quarter, despite weaker sales amid a consumer backlash centered around Target’s promotions for Pride Month. The company’s earnings report came just a day after the retail sales report for July showed a stronger-than-expected acceleration on a sequential basis.

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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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