Is Target a Buy After the Recent Dip?

As revenues dropped by almost 50% year over year. Concerns about the “rapidly evolving consumer environment” were raised, since they pose a threat to future growth. The company’s stock price fell as much as 15% on the day of publishing its earnings last week and ended the same week almost 5% down.

In its statement, the CEO said that profits had gone soft, particularly during the last weeks of the third quarter, citing the impacts of inflation, economic uncertainty, and rapidly rising interest rates that are biting into consumers’ purchasing power and changing buying habits.

With a worldwide slow-down on the horizon and its share price crumbling, is the big box chain capable of bouncing back and rewarding patient investors?

Q3 In a Nutshell

Compared to last year, total revenue grew by 3.4% to $26.5 billion. Operating income was $1 billion in the third quarter of 2022, which was 49.2% less than it was in the third quarter of 2021, at around $2 billion. This was mostly due to a drop in the company’s gross margin rate. Earnings per share also came in at $1.54, well below the $2.13 target.

It wasn’t all bad news, as the company did see improvements in areas like beauty, food, and home staples, but persistent weakness in discretionary categories was a drag on the bottom line. Even while Target has made some headway in reducing the surplus of inventory it built up in the first half of the year, analysts still see the store’s wide product offering as a weakness.

Further highlighting Target’s difficulties, last Wednesday, we also learnt that October retail sales in the United States increased by 1.3%. This was the largest growth in retail sales in eight months, and it beat the gain forecast by analysts by 0.2 percentage points.

The Q4 Forecast and Beyond

In view of the deteriorating business climate, the company has reduced its fourth-quarter revenue and profit projections to an operating margin rate of around 3%.

It also has plans to launch a company-wide drive to streamline and improve operations in order to save between $2 and $3 billion over the next three years. Although they didn’t specifically explain how, the extra 40% of growth that took place over the pandemic is part of how they expect to leverage for improvements in how they operate.

Management cautioned that fourth-quarter same-store sales are anticipated to fall, which is one of the most important metrics in the retail business. This equates to the total revenue generated by a company’s locations that have been operating for at least a year.

Target’s share price has already dropped by one-third this year, causing some in the industry to refer to the company as a bit of a bargain.

It’s understandable if prospective investors are hesitant to purchase the company’s stock given the three straight quarters of disappointing profitability and a gloomy prognosis for the Christmas shopping season. However, some feel that Target stock is a good buy-on-the-dip choice. Investors who are patient and willing to wait might benefit from seeing how the current quarter (or two) plays out for the company.

How Are Other Retailers Fairing?

Walmart

In contrast to Target, Walmart surprised investors last Tuesday by reporting quarterly earnings that were higher than anticipated, with particular success at Walmart US, Sam’s Club US, Flipkart, and Walmex. The company in response raised its fourth-quarter forecast and announced a fresh $20 billion share buyback program.

Overall revenue was $152.8 billion, representing an increase of 8.7% (or 9.8% when measured in constant currency).

The impact of currency changes had a negative effect of $1.5 billion on Walmart International’s net sales, which came in at $25.3 billion. This number still represents an increase of $1.7 billion, or a 7.1% increase. Earnings per share came in at $1.50 adjusted, well above the $1.32 forecast.

Walmart’s Christmas expectations were more muted than in previous years. The company forecasted a 3% increase in comparable sales for its US operations, excluding the impact of fuel sales.

The company last week also announced it was agreeing to a multi-billion dollar settlement for lawsuits in regards to its pharmacies and the opioid crisis in the US. The $3.1 billion payment was in response to allegations of improperly filled prescriptions for the highly addictive painkillers. Walmart in its statement denied any liability and strongly disputed all claims.

Dollar Tree

As customers continue to downshift to the bargain retail industry in the face of increasing inflation and uncertain economic outlook, Dollar Tree reported Tuesday better-than-expected profitability for the third quarter and increased its full-year sales prediction.

Total net sales rose by 8.1% to $6.94 billion. Same-store sales for Enterprise went up by 6.5%. The company’s same-store sales went up 8.6%, or 8.5% when currency changes were taken into account. This was due to a double-digit increase in the average ticket, which was partially offset by a drop in traffic.

Despite the positive results, however, the group’s prediction that diluted profits would be in the “lower half” of its earlier prediction of between $7.10 and $7.40 per share caused shares to fall sharply after the results were published.

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