Target shares soar on bullish forecast despite inflation, Pride backlash
Target on Wednesday forecast holiday-quarter profit largely above Wall Street expectations as the big-box retailer benefits from easing supply chain costs and its efforts to control inventory start to pay off, sending its shares up 18%.
Target’s stock has lost a quarter of its value in a turbulent year marked by elevated inflation.
Shoppers have squarely focused on food and essentials, while showing reluctance to spend on home goods, electronics, toys and apparel that are deemed less essential.
Target CEO Brian Cornell said on a post-earnings call that though shoppers are still spending, the company was not out of the woods as higher interest rates, the resumption of student loan repayments, increased credit card debt and reduced savings keep up the pressure.
Cornell said more consumers are delaying their spending until the last moment, for example shoppers who previously bought sweatshirts or denim in August or September were waiting to buy them until the weather turns cold.
“This is a clear indication of the pressures they’re facing as they work to stretch their budgets until the next paycheck,” he said.
To adapt to this shifting behavior, Target said it would place a big focus on value, for example, offering over two-thirds of its holiday toy collection and holiday decorations priced below $25 and $20, respectively.
This includes an exclusive FAO Schwarz toy collection, with 50% of the assortment under $20 and $15 ornament sets and baking products and $10 throw pillows and tree skirts.
The company is also offering four weeks of deals leading up to Black Friday where it plans to showcase its new collections with Kendra Scott jewelry, Fenty Beauty and an exclusive kitchenware brand called Figmint.
Consumer pressure
Signs emerged of easing consumer pressure ahead of the holidays, with Commerce data showing that consumer prices didn’t change in October and the annual rise in underlying inflation was the smallest in two years.
On Wednesday, Target forecast adjusted earnings to land between $1.90 and $2.60 per share in the fourth quarter.
The midpoint of that range topped analysts’ expectations of $2.22 per share, according to LSEG data.
It also expects holiday-quarter comparable sales to decline in the mid-single-digit percentage range, compared with expectations of a 3.97% drop.
Dave Wagner, equity analyst and portfolio manager at Aptus Capital Advisors said the wide range of Target’s outlook showed that executives had “no clue” on what to expect this holiday season.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, said he viewed the results as things getting better from a margin standpoint.
“Investors are rewarding the stock because it is getting better than where it came from,” Mulberry said.
Target said its forecast follows a third quarter in which gross margins improved to 27.4%, from 24.7% a year earlier, due to fewer discounts, a 14% reduction in inventories and related costs, and lower freight, supply-chain and delivery expenses.
Target has faced unique challenges this year including backlash in May over its LGBTQ-themed merchandise and a spike in retail thefts that it said led it to shut nine stores in New York, San Francisco, Seattle, and Portland, Ore.
On Wednesday, executives said inventory losses caused by issues including theft and accounting errors had decreased and would not be as bad in the fourth quarter compared to prior quarters, in part due to tight control on inventories.
The stock closed at $130.46, up $19.67.
