Target's Stock Surges as Shrink Costs and Lower Markdowns Boost Profits

Target Corp.'s shares experienced a notable surge of 11.4% on Tuesday following the announcement of its fiscal fourth-quarter profit, surpassing expectations. The retail giant's impressive performance was attributed to reduced markdowns and lower shrink costs, contributing to improved margins. Despite this positive outcome, Christina Hennington, Target's Chief Growth Officer, provided insights into the mixed consumer outlook during a conference call.

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Hennington acknowledged some encouraging signs in the economy but highlighted persistent pressures affecting both families and retailers. Consumers, she noted, still feel financial strain, juggling various priorities and making trade-offs to meet family needs while occasionally indulging in luxury. Despite these challenges, consumers exhibit an affinity for style and newness, coupled with early signs of disinflation, resulting in an uptick in discretionary-category performance over the past two quarters.

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However, Hennington emphasized that consumers remain highly value-conscious, seeking great promotions and comprehensive value in their purchases. The aftermath of the global pandemic has left them dealing with geopolitical tensions, social and political divisiveness, and uncertainty about personal finances, adding an additional layer of complexity to their decision-making process.

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Target's stock recorded its most significant one-day gain since November 15, soaring 17.8% on that day when the company reported third-quarter results. The company attributed its recent success to maintaining appropriate inventory levels, which enhanced profitability by lowering markdown rates, improving in-stock measures, and reducing inventory-related costs.

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The fiscal fourth-quarter net income reached $1.38 billion, or $2.98 per share, surpassing the previous year's figures of $876 million, or $1.89 per share. Excluding nonrecurring items, the adjusted earnings per share of $2.98 exceeded the FactSet consensus of $2.42. Target's gross margin improved to 25.6% from 22.7%, reflecting lower markdowns, reduced inventory-related costs, lower freight costs, and decreased supply-chain and digital-fulfillment costs.

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BMO Capital analyst Kelly Bania noted that Target's gross margin surpassed expectations by more than 1 percentage point. The company also reported lower shrink costs compared to the previous year, as the timing of inventory accruals offset continued increases in loss rates. The value of inventory held at quarter-end decreased by 11.9% to $11.89 billion.

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While total revenue grew 1.7% to $31.92 billion, same-store sales fell 4.4%, outperforming expectations of a 4.5% decline. CEO Brian Cornell highlighted a sequential improvement in business performance from the second to the fourth quarters, with discretionary declines moderating and traffic trends rebounding.

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Looking ahead, Target anticipates adjusted EPS of $1.70 to $2.10 for the first quarter, compared to the current FactSet consensus of $2.08. The full-year adjusted EPS is projected to be between $8.60 and $9.60, with expectations of $9.15. Target expects first-quarter same-store sales to decline 3% to 5%, while the FactSet consensus suggests an increase of 1.3%.

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In addition to its financial achievements, Target announced the rollout of its new Target Circle membership program to meet consumers "where they are" and reignite sales, traffic, and market-share gains. The company emphasized its commitment to share repurchases, with $9.7 billion remaining in the repurchase program established in August 2021.

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Despite the impressive 26.4% rally in Target's stock over the past three months, the Consumer Staples Select Sector SPDR exchange-traded fund (XLP) has gained 6.3%, and the S&P 500 has advanced 11.7%. Target's performance remains noteworthy in the context of the broader market landscape.

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