What to Expect with Target Earnings as Gross and Operating Margins Shrink

Retail giant Target is due to report second quarter earnings premarket on Wednesday. TGT has already cut its profit outlook twice in three weeks with its EPS expected to fall by around 80% year-over-year after rapidly liquidating its excess inventory. $TGT reported worse than expected first-quarter earnings missing on major metrics and its shares fell over 26%. Competitor Walmart reports Tuesday. Gross and operating margins are expected to shrink further again in the quarter, as discounts and higher supply-chain costs squeeze profits.

Target sales

Earnings Preview

Expectations for TGT second quarter of 2022:

  • Adjusted earnings per share (EPS) are forecast at: $0.72
  • Consensus Revenue Estimates: $26.10B
  • Target has exceeded EPS and revenue estimates in 7 of the past 8 quarters, the big miss came last quarter.

The numbers

  • Long-term debt rating of A (Standard & Poor’s)
  • Pays out only a small portion of its earnings as dividends (Free Cash Flow Important with inventory bloating).
  • TGT pays $1.08/share quarterly dividend, 20% increase from prior dividend of $0.90.
  • Forward Dividend & Yield 4.32 (2.55%)
  • TGT’s 52-week range is 137.16 – 268.98, Friday 8/12/22 close was 169.60.

What to watch for:

  • Need to liquidate further excess inventory? Further markdown expenses are possible if customers continue to shift consumption into essential categories.
  • Soaring inflation has seen TGT already forced cut its profit outlook twice in three weeks during the second quarter, as soaring stockpiles left the company unprepared to deal with changing demand.
  • Inventories are expected to grow by 13% from a year ago, based on consensus estimates.
  • Gross and operating margins are seen falling from last year again in the quarter, as discounts and higher supply-chain costs eat into profits.
  • Target’s results could give insights into what to expect for the back-to-school shopping season

Evercore ISI Note on Target Ahead of Earnings

  • Gave near-term price objective of $155 to imply 9% downside.
  • Says TGT is a reflection of a de-risked Q2 print, with a very depressed 2% EBIT margin reflecting write-offs and progress in getting through the excess inventory.
  • Evercore concern is margins are likely to remain under pressure into the second half of the year to ultimately question the earnings power quickly recovering to +$12 EPS in 2023, which appears to be quickly pricing into the stock at its current level.

“Our analysis of apparel inventory levels from Census Bureau shows that channel inventory is elevated, even with demand trends moderation. Walmart’s profit warning from 7/25 suggests that some of the inventory clearance headwinds from 1H22 are likely to persist into 2H22 as well. Additionally, while diesel prices have begun to ease recently toward $3.50, they were elevated during Target’s FY2Q at $4.45 on average vs. the 1Q average of $3.25 likely signaling near term profit pressure.”

Evercore on TGT

UBS Note on Target Ahead of Earnings

Analyst Michael Lasser told clients Target is likely to emerge much stronger after its second quarter results than it did following its first quarter print.

  • “Target’s multiple guidance cuts this year do not necessarily translate to doom and gloom for the stock,”
  • “We believe TGT is well positioned to capitalize on changing consumer behaviors and habits.”
  • “At the heart of these questions is whether [Target] has taken aggressive enough action to clear out its inventory and can it maintain its comp momentum into ’23, We think the answer to these questions is yes.”
  • He added that the company’s forecasts into 2023 for earnings appear “achievable if not conservative”,
  • Models well above the analyst consensus into the coming year.
  • Lasser currently forecasts 2023 EPS to come in at $12.85 against a Wall Street consensus of $12.06.
  • “We think there’s going to be more support for the bull case than the bear case coming out of this print,” he concluded. “This will push the stock higher, in our view.”
  • Lasser reiterated a “Buy” rating on the stock alongside a $205 price target.

TGT Q1 Earnings Recap

 Target Corporation NYSE: TGT Reported Earnings Before Market Open Wednesday

 $1.09 Missed $1.11 EPS and $17.59B Missed $17.812 billion forecast in revenue 

Target said it would try not to pass cost increases to consumers through higher prices for its goods, trading short-term profit for what it hopes will be longer-term market-share gains.

Target Corporation NYSE: TGT reported earnings per share of $2.16, down 48% from a year earlier, and below Wall Street forecasts of $3.00. Total revenue increased 4% to $25.2 billion missing the forecast 24,528 million. Operating income was $1.3 billion, down from $2.4 billion for the same quarter in 2021.

Comparable sales, including sales from Target stores or digital channels operating for at least 12 months, rose 3.3% from the prior year, the company said. Digital sales climbed 3.2% its slowest growth since the beginning of the pandemic.

Target’s debit card penetration contracted 50 basis points (bps) to 11.6%, while credit card penetration increased 30 bps to 8.7%. Total REDcard penetration declined to 20.3% from the year-ago quarter’s 20.5%.

“Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time,” Target Chief Executive Brian Cornell told reporters.

Target Corporation NYSE: TGT

Market Reaction – $158.60‎-26.33%


Mr. Cornell said shoppers are “moving from buying small kitchen appliances and maybe replacing that with gift cards to restaurants and entertainment as they return to a more normalized lifestyle”.

“While we don’t like the impact to our profitability in the short term, we know it is the right thing to do for our guests and our business over the long term,” said Chief Financial Officer Michael Fiddelke.

  • Target’s operating income margin rate was 5.3%, compared with 9.8% in the year-earlier period, with the retailer saying it expected a similar level of profitability in the current quarter.
  • For the full year, the company said it continues to expect an operating margin rate in a range centered around 6%.
  • Target said it had no plans to cut its planned annual capital expenditure of $4 billion to $5 billion. It has opened seven new stores so far in 2022 and plans to open 30 throughout the year.

Source: Target, AlphaStreet