Target (TGT (opens in a new tab)) the stock fell on Wednesday after the discount retailer again missed Wall Street’s quarterly earnings estimate and warned that a key measure of sales would decline during the critical period holiday sales period.
What’s even more troubling for investors in Target stock is that the chain has some company-specific issues.
For example, another discount retailer walmart (WMT (opens in a new tab)) wowed investors on Tuesday after it reported better-than-expected quarterly results, raised its outlook and announced a new $20 billion share buyback program.
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Walmart’s trio of good financial news put Target’s lackluster performance in sharp relief. To make matters worse, we also learned on Wednesday that US retail sales for October jumped 1.3%. Not only did that estimate from top economists point to a 1.2% gain, but it represented the largest increase in retail sales in eight months.
Quarterly results better than expected elsewhere in retail also highlighted Target’s poor results. Off-price retailer TJX (TJX (opens in a new tab)) beat Street’s earnings forecast on Wednesday, as did the home improvement chain Lowe’s (DOWN (opens in a new tab)). Home Improvement Rival Home deposit (HD (opens in a new tab)) released better-than-expected quarterly results on Tuesday.
To complicate matters, Target has now missed analysts’ earnings per share (EPS) forecasts for three straight quarters.
Target stock spools on missed EPS
For the three months ended Sept. 30, Target posted adjusted EPS of $1.54, well below Street’s forecast for adjusted EPS of $2.18, according to data from S&P Global Market Intelligence. Granted, revenue of $26.5 billion managed to top the street estimate for $26.4 billion in sales, but any relief was negated by the company’s disappointing same-store sales forecast. .
In a blow to Target’s stock price (it was down nearly 17% at the opening bell), management warned that same-store sales are expected to decline in the current fourth quarter. Comparable store sales, which typically measures sales at stores that have been open for at least a year, is a critical retail industry metric that shows how well a business is growing revenue within its existing store base.
And, by extension, its margins.
Target blamed weak same-store sales on markdowns and more cautious consumers.
“During the final weeks of the quarter, sales and earnings trends moderated significantly as customer buying behavior was increasingly impacted by inflation, rising interest rates and uncertainty. economic”, General Manager Brian Cornell said in a statement (opens in a new tab). “This translated into third-quarter earnings performance well below our expectations.”
Target reported strength in categories such as beauty, food and beverage, and essential household items, but continued weakness in discretionary categories weighed on net income. And while Target has made progress in eliminating an inventory glut that built up in the first half of the year, its assortment of merchandise is still a bit of a liability, analysts say.
“Clearly, TGT is having a harder time than WMT due to its wider range of discretionary products, with the exception of beauty products, which were on the rise in mid-teens,” writes Arun Sundaram, analyst at CFRA Research, which evaluates the stock of Hold.
Wall Street calls the target stock to buy, but…
Analysts as a group, however, remain bullish on the name. Target stock has now lost a third of its value so far in 2022, and that’s a bargain for a big chunk of street call stocks.
Of the 32 analysts covering TGT stock tracked by S&P Global Market Intelligence, 15 rate it Strong Buy, seven say Buy and 10 call it Hold. This equates to a consensus buy recommendation, with high conviction.
Meanwhile, the average street target price of $190.44 gives the target stock an implied upside of around 23% over the next 12 months or so. Add the 2.4% dividend yield and the implied total return on TGT stock exceeds 25%.
Many analysts view Target stock as a candidate to buy on the downside, but it’s understandably missing its three straight quarters of earnings and the pessimistic holiday outlook is giving would-be investors pause.
Patient investors could very well be rewarded for committing new capital to Target stocks at current levels. On the other hand, what is the rush? Patient investors probably might as well wait and see how Target’s current quarter (or two) goes.