Target Slumps After Second Quarter Profit Drops Nearly 90%

Ticker Symbol: TGT

Target, the large U.S. discount retailer, dropped around 3.5% at market open after producing a weak earnings report for its second fiscal quarter. Earnings per share fell 89.3% year over year to 39¢ which was lower than the average analyst estimate of 79¢. The miss comes on the heels of a first quarter miss the company reported and when the company’s shares tanked by 27%, the most ever since 1987. Target’s shares are down 24% on a year-to-date basis, vastly underperforming direct competitor Walmart, whose shares are down 1.9% and the broader S&P 500 which is down just over 10%.

Unlike Walmart yesterday, which soared after producing better than expected results, Target has continued to face challenges because of its inventory build through the first half of the year. The company pursued discounting strategies to get rid of some of that inventory, which meant lower top-line growth than anticipated. Much like Walmart, sales did grow compared with the second quarter of 2021, up 3.3% to $25.65 billion. However, the number missed analysts’ expectations of sales of $25.85 billion.

Comparable sales, a key metric that tracks sales at stores open for at least 13 months, grew 2.6% during the three-month period, but below the 2.85% rate expected by Wall Street. Importantly, however, digital only sales were up 9% relative to the 6.3% growth expected by investors. Digital sales represented 17.9% of total sales, versus the 17% the company reported in the same period last year. The retailer also reported that it had 1,937 total stores in operation as of July 31^st which was lower than the estimates of 1,947 stores.

Gross margins slid precipitously, declining to 21.5% from 30.4% in the second quarter of last year, and missing estimates of 24%. Operating income dropped to $321 million, below the $530 million expected. Income missed because operating margins declined to only 1.2% and lower than the 2% target the company set in June. The firm also missed on the crucial earnings before interest, taxes, depreciation, and amortization metric, reporting EBITDA of $979 million, which was down 68% over 2021, and below the $1.2 billion expected.

Critically, however, the company maintained its fiscal year targets despite the weak performance in the first two quarters. Chief Executive Officer Brian Cornell said he still sees full-year revenue growth in the low to mid-single digit range and that operating margins would improve to around 6% in the back half of the year. Management retained optimism for the holiday shopping season as well. Target’s sales mix is more oriented to discretionary items as opposed to essentials at Walmart. Discretionary shopping typically tends to pick up in the second half of the year.

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