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Key Takeaways
- Target stock has been on a roller coaster ride as the company has warned of inventory issues and a slow holiday shopping season.
- Target is experiencing an increase in foot traffic as well as sales for its private-label brands.
- Long-term investors could use this pullback as a buying opportunity.
Target released its third-quarter earnings, and the stock took a beating. While their inventory levels have improved since the second quarter, it is still an issue for the retailer. This, along with a weak outlook for the holiday season, scared many investors into selling the stock. But is it all bad news for Target? Or is this a chance to buy a great retailer that Wall Street has oversold? Here is what investors need to know.
Target stock in the news
Target’s earnings report for the third quarter of the 2022 fiscal year showed the retailer is still suffering from a slowdown in consumer spending. The most significant sign of troubles was the 2.7% sales growth recorded by the end of October. The stock saw its first precipitous drop in May 2022 and has been on a roller coaster of price spikes and dips. From the news release on Wednesday, November 16 though Monday, November 21, Target has lost 12% of its stock value after it cut its sales forecast for the holiday season.
The company’s operating profit margin for the quarter was 3.9%, lower than analysts’ expectations of 5.35%. Multiple issues affect Target’s ability to turn a profit, and excess inventory has been a large part of the problem. Target and other retailers overcompensated for pandemic-related supply chain issues by over-ordering to keep shelves full. Many stores, including Target, are now facing difficulties getting inventory out of seaports and into the intermodal system for delivery. They’re also facing a general change in consumer shopping habits, driven by higher-than-normal inflation. Target’s now dealing with the cost of storing excess inventory, discounting nonessential items to encourage sales, and facing lower profitability.
Target is anticipating a weak holiday season for sales as inflation has eroded consumers’ discretionary income. People are still buying gifts, just fewer of them, as their dollar doesn’t stretch as far as it once did. Other retailers like Walmart have a reputation for being cheaper than Target, which has likely contributed to a decrease in revenue for Target. Another issue Target is dealing with in terms of losses is organized retail theft crime, which they estimate reduced their gross margin by $400 million in 2022. Target predicts it will lose $600 million by the end of the year to these criminal networks.
Target’s weak guidance impacting other retailers
Target’s prediction for a weak fourth quarter also took down other major retailers’ stock values. Macy’s lost 8.1%, Best Buy dropped 8.6%, and vance Auto Parts fell 15.1%. Investors were likely worried that these and other major retailers wouldn’t be able to meet analysts’ performance expectations for the last quarter of the year due to carrying excess inventory and weak consumer spending.
However, it appears Target is facing at least some issues unique to them. Walmart beat earnings per share estimates by close to 14% and revenue by more than 3%. Bath and Body Works beat earnings per share estimates by 101% and revenue by 3%. Macy’s beat earnings per share estimates by 273% and revenue by 0.5%. On the other hand, Target missed earnings per share estimates by around 28% and narrowly beat revenue estimates by 0.44%.
Target Income Statement review
Target reported a total of $26.1 billion in sales, a 3.3% change from $25.3 billion in the same quarter in 2021. Its total revenue was $26.5, a 3.4% increase from $25.7 billion in the same period of 2021. Its operating income was about $1 billion, a decline of 49.2% from close to $2 billion in the third quarter of 2021. Its earnings before taxes were $909 million, down 52.4% from $1.9 billion in the same quarter in 2021.
Target reported third-quarter GAAP earnings per share of $1.54, down almost 50% from $3.04 per share in the same quarter of 2021. It reported comparable sales growth of 2.7% and saw unit share gains both in store and online. Target stock paid $1.08 per share in dividends, an increase of 20% from $0.90 in the same quarter of 2021.
Target Balance Sheet review
Target reported having cash and cash equivalents of $954 million in the third quarter, down from $5.7 billion in the third quarter of 2021. It held $17.1 billion in inventory, an increase from $14.96 billion year-over-year, and has total current assets of $20.4 billion. The overall total of Target’s assets is $55.6 billion, an increase from $54.4 billion in the third quarter of 2021.
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Its accounts payable, accrued and other current liabilities, and current portion of long-term debt totaled $23.8 billion, and its noncurrent liabilities totaled $20.8 billion. Its shareholder’s investment in common stock was $38 million, with $6.5 billion in additional paid-in capital, and retained earnings of $4.6 billion for a total shareholders’ investment of slightly over $11 billion.
Target stock outlook
An issue Target faces is that it’s positioned itself as a more expensive alternative to Walmart. Both carry similar items, but Target’s reputation is that it focuses less on being a one-stop store and provides higher-end goods than Walmart. And it seems price-sensitive customers have switched their allegiance to the lower-cost goods at Walmart. Combine this with Target’s over order of merchandise, and you can see the tricky situation they’ve put themselves in.
The only solution for Target has been to discount general merchandise to get it out of inventory. While this will help to lower the amount Target has tied up in inventory, it hurts revenue. The lower the price paid for items, the less revenue Target earns, which impacts the stock price and the company’s financials moving forward.
It will take time for inflation to pass and the inventory backlog to ease, but these are short-term issues that eventually work out. Shoppers have yet to abandon Target, as traffic increased by 1.4% year-over-year in the most recent quarter. The company is hoping to save up to $3 billion over the next three years by becoming more efficient and focusing on “reducing complexities and lowering costs.”
Target also owns a number of in-house brands which carry a favorable reputation among shoppers. These private-label products saw sales grow at twice the rate of Target’s enterprise quarter three sales.
The short-term outlook for Target stock is rocky because of the immediate concerns about slowing sales and a poor holiday outlook. The long-term view for Target’s stock price is good as the retailer has no plans to close stores, has plans to invest in the appearance of its stores, and has been opening additional sorting centers to take merchandise from stores and deliver it quickly to customers.
Bottom Line
While concerned about the loss of revenue and sales, Target is looking towards the future and is taking the financial hits in stride. The company is still profitable and still gaining market share. This could be an excellent time to buy Target stock at a lower price and hold for the long term once the economy stabilizes and people return to their old spending habits. However, understand that the next few earnings reports the company releases could be bad. But as a long-term investor, these could be considered additional buying opportunities.
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