Target Is Down By 24%, Here Is Why

Key Insights

• Target stock declined below the $165 level after Q1 report indicated that the company failed to pass higher costs to consumers. 
• Yesterday, Walmart released a weak quarterly report, and the whole segment is under pressure during today’s trading session. 
• Target stock is trading at just 10 forward P/E, but analyst estimates will likely decline in the upcoming weeks. 

Target Falls After Weak Quarterly Report

Shares of Target  gained strong downside momentum after the company released its first-quarter report. The company reported revenue of $25.17 billion and adjusted earnings of $2.19 per share, beating analyst estimates on revenue and missing them on earnings.

According to the report, comparable sales increased by 3.3%, reflecting traffic growth of 3.9%. Operating margin rate was just 5.3%, “driven primarily by gross margin pressure reflecting actions to reduce excess inventory as well as higher freight and transportation costs.” In the second quarter, Target expects that operating income margin rate will be in a wide range centered around 5.3%.

Traders were shocked that Target failed to pass higher costs to consumers, and the stock lost 25% of its value. Yesterday, Walmart also presented a weak report, and it looks that retailers are not as safe as many investors expected.

What’s Next For Target Stock?

Target is expected to report earnings of $14.64 per share in the current year and earnings of $15.95 per share in the next year, so the stock is trading at just 10 forward P/E, which is cheap for the current market environment.

However, the company has just released a weak quarterly report, so analyst estimates will likely decline in the upcoming weeks. In addition, the whole segment is under pressure after disappointing reports from leading companies like Walmart and Target, so retail stocks will likely need additional upside catalysts to break the current downside trend.

The key question is whether Target’s inability to pass higher costs to consumers is a one-time event or a beginning of the new trend, which would hurt its profitability in the upcoming quarters. The company’s Q2 margin forecast is not inspiring, and it remains to be seen whether speculative traders will rush to buy Target stock despite the major pullback.

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