Target's Stock Plunges After Profit Misses as Americans Spend to the Limit

On Wednesday, Target Corp.'s shares experienced a significant decline, marking their largest drop in almost two years, following the release of its fiscal first-quarter earnings report, which showed profits falling short of expectations due to weak sales of discretionary items.

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Despite this, Target's gross margin improved for the fifth consecutive quarter. This improvement was driven by cost-cutting measures and reduced freight rates, which offset the increased rates of promotional markdowns.

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Chief Growth Officer Christina Hennington, during the post-earnings call with analysts, attributed the results to a “meaningful dip” in consumer confidence in April. The persistently high prices have strained budgets and savings for many families. According to an AlphaSense transcript, Hennington noted, “Currently, one in three Americans has maxed out or is nearing the limit on at least one of their credit cards.” Given these factors, Hennington expressed caution regarding Target's near-term growth outlook.

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Hennington also indicated that while discretionary spending trends are expected to remain under pressure in the short term, they should normalize over time.

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Target's stock (TGT) dropped 7.4% in morning trading, leading the decliners in the S&P 500 index (SPX). The stock was on track for its lowest close since February 5 and was headed for its biggest one-day decline since a 13.1% drop on November 16, 2022.

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For the quarter ending May 4, Target's net income fell to $942 million, or $2.03 per share, from $950 million, or $2.05 per share, a year earlier. This was below the FactSet consensus of $2.06 per share, marking Target’s first profit miss in six quarters.

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The gross margin rose to 27.7% from 26.3%, as the cost of sales decreased more significantly than revenue, which was down 5.1% to $17.45 billion.

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Total revenue declined 3.1% to $24.53 billion, slightly exceeding the FactSet consensus of $24.52 billion. Comparable sales, reflecting sales at stores open at least 13 months, fell 3.7%. This decline was driven by ongoing weakness in the home and hardlines categories, which overshadowed strength in beauty products. The number of transactions and the average transaction amount each fell by 1.9%. Nonetheless, the 3.7% decline in comparable sales matched the consensus.

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Comparable sales have now declined for four consecutive quarters.

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On a more positive note, CEO Brian Cornell mentioned that with inflation having "moderated significantly" over the past few quarters, there has been a "meaningful improvement in discretionary trends," particularly in apparel. This gives the company optimism for a better balance of spending between discretionary and frequent purchase categories in the future.

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Target’s sales decline report came about a week after Walmart Inc. reported a 6% revenue growth and a 3.8% same-store sales increase for its U.S. stores. However, Walmart, despite noting a decline in spending on discretionary items, has a different sales mix: general merchandise made up 25.8% of Walmart U.S. sales last year, with groceries accounting for 59.8%, while food and beverage constituted just 22.6% of Target’s total sales last year.

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Additionally, Target reported that its inventory value at the quarter’s end was $11.73 billion, down 7% from the previous year. The company also noted that it did not repurchase any shares during the quarter and has not done so since the second quarter of 2022.

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Looking ahead, Target anticipates second-quarter adjusted EPS of $1.95 to $2.35, aligning with the FactSet consensus of $2.20. Comparable sales are expected to be flat to up 2%, below the current expectation of a 2.4% rise.

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D.A. Davidson analyst Michael Baker commented that while Target's earnings report was "not the best print of all time," it was largely in line with his expectations, making the stock's selloff appear overdone. Baker suggested this could be an attractive entry point as comparable sales turn positive.

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For the full year, Target maintained its adjusted EPS forecast at $8.60 to $9.60 and now expects same-store sales to be flat to up 2%, compared with previous guidance of “a modest increase.”

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Year-to-date, Target's stock has risen 1.2%, while Walmart shares have surged 24.6%, and the S&P 500 index has advanced 11.6%.

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