Target continues to hope that short-term pain leads to long-term gain — even if that short-term pain is piercing and casts doubt on the near-term direction of the stock price.
On Wednesday morning, Target uncorked its second consecutive significant earnings miss as it battled a three-headed monster attacking profits: deep discounts to clear slow-moving inventory in apparel and electronics, high levels of inflation from vendors, and a more cautious consumer.
These elements collectively triggered an 890 basis points year-over-year drop in Target's gross profit margins for the second quarter.
Here is how Target performed compared to Wall Street estimates for the second quarter:
Net Sales: $26 billion vs. $25.84 billion
Comparable Sales: +2.6% vs. $2.84%
Gross Profit Margin: 21.5% vs. 24.2%
Operating Income: $321 million vs. $534.8 million
Diluted EPS: $0.39 vs. $0.73
Full Year Outlook:
Sales: up low to mid-single digit percentage
Operating Margin: "around" 6% in the second half of the year
On a call with reporters, Target CEO Brian Cornell and CFO Michael Fiddelke struck a hopeful tone on the business for back to school, Halloween, and the holidays. The pair also stressed that Target is mostly done with its aggressive adjustments to inventory levels that weighed heavily on second quarter profits.
"We've talked to consumers and our guests on a regular basis and one of the things we keep hearing back is the guest wants to celebrate the upcoming holiday season — and Target is a big part of how they celebrate," Cornell said. "So we certainly expect a very engaged consumer when we come to Halloween, and people will be out for trick or treating and having Halloween parties with family and friends. We expect that the dinner table will be set for Thanksgiving this year. And we'll have lots of people around it. And we certainly expect our guests will celebrate the Christmas holiday season. So we're going to be leaning into those moments."
Overall, the earnings miss came with a slightly different tone around the business compared to rival Walmart, which reported less relative profit margin pressure and a slight improvement in sales late in the second quarter as gas prices fell.
Target shares have rallied to the tune of 22% in the month leading up to the company's earnings. But the magnitude of the earnings miss — and only reiteration of full year sales guidance — could feed the negative view on the stock some on Wall Street have adopted.
"We think the recent stock run is a reflection of a 'de-risked' 2Q print [earnings release], with a very depressed 2% EBIT margin reflecting write offs and progress in getting through the excess inventory," Evercore ISI analyst Greg Melich wrote in an earnings preview note to clients. "Yet our concern is that margins are likely to remain under pressure into second half 2022, ultimately questioning the earnings power quickly recovering to $12+ in 2023 which appears to be quickly pricing into the stock nearing $170."