Q2 2022 Earnings Target (TGT): Profits fall nearly 90%

FILE PHOTO: Shoppers leave a Target store during Black Friday sales in Brooklyn, New York, U.S., November 26, 2021.

Brendan McDermid | Reuters

Target on Wednesday said its quarterly profit fell nearly 90% from a year ago, as the retailer followed through on its warning that steep markdowns on unwanted merchandise would weigh on its bottom line.

The big-box retailer missed Wall Street expectations by a wide margin, even after the company itself cut guidance twice.

However, the company reiterated its full-year forecast, saying it is now positioned for a rebound. He said he expects full-year revenue growth in the low to mid-single digits. Target also said its operating margin rate will be around 6% in the second half of the year. That would represent a jump in its operating margin rate of 1.2% in the fiscal second quarter.

Shares of Target fell more than 3% in early afternoon.

CFO Michael Fiddelke defended Target’s aggressive inventory efforts. He said the retailer needed to move quickly, so it could clean up the mess, prepare for the holidays and navigate an economic climate clouded by inflation.

“If we hadn’t dealt with our excess inventory head-on, we could have avoided some short-term pain on the bottom line, but that would have hindered our long-term potential,” he said on a call with reporters. “While our quarterly profit took a significant step forward, our future path is brighter.”

Here’s how Target did for the three-month period ending July 30, compared to Refinitiv’s consensus estimates:

Earnings per share: 39 cents vs. 72 cents expected Revenue: $26.04 billion vs. $26.04 billion expected

Target has had a strong reversal of fortunes over the past two quarters. After posting quarter after quarter of amazing sales numbers during the Covid pandemic, it has seen clothes, coffee makers, lights and more on the shelf, then kicked off the shelf. Some of this excess merchandise is the same that sold out during the early parts of the pandemic, when shoppers grabbed home decor and loungewear.

The shift forced the big-box retailer to cut its profit outlook twice, once in May and again in June, and to pledge to move quickly to achieve a healthier inventory level.

However, inventory was still high: $15.32 billion at the end of the second quarter, compared to $15.08 billion at the end of the first.

But CEO Brian Cornell said on the call with reporters that it’s a more favorable mix, as Target leans toward high-frequency categories such as food and home staples, along with categories popular as seasonal merchandise. It canceled more than $1.5 billion in orders for discretionary categories with lower demand.

Fiddelke said the inventory number is higher due to cost inflation and receiving inventory earlier to ensure Target is ready for the holidays.

In the second quarter, the company’s net income fell to $183 million, or 39 cents a share, from $1.82 billion, or $3.65 a share, a year earlier.

Total revenue rose to $26.04 billion from $25.16 billion a year ago, driven in part by higher prices due to inflation.

Quarterly profits were down in a number of different ways. Sales of many merchandise became less profitable as they were discounted. Freight, transportation and shipping costs increased, as fuel prices increased. And the company had to add headcount and cover more compensation at distribution centers as it dealt with a glut of extra stuff.

A cautious approach

Big-box rival Walmart said Tuesday it had seen a marked shift in consumer behavior even wealthier households looked for bargains on groceries and necessities. The company told CNBC that roughly three-quarters of its food market share gains came from households with annual incomes of $100,000 or more.

Target, on the other hand, said it’s not seeing as much change fueled by inflation. Unit sales grew in all five major merchandise categories, with particular strength in two categories: food and beverage, and beauty and homeware.

While profits fell, comparable sales and traffic rose.

Comparable sales, a key metric that tracks sales online and at stores open at least 13 months, grew 2.6% in the second quarter, on top of an 8.9% increase last year . That was below estimates, which had called for a 2.8% increase, according to StreetAccount. At Target’s stores and its website, traffic was up 2.7% year-over-year.

Fiddelke, the CFO, said traffic growth is proof that shoppers still have spending power and will help Target achieve its more optimistic profit outlook for the back half of the year.

“The resilience of this strong response from guests positions us well, even if I can’t predict all the curveballs that could come our way in the fall season,” he said on the call with reporters.

Food and beverage was Target’s strongest category in the three-month period, with comparable sales growth in the low double digits, the company said. Beauty grew in high single digits as Target adds Ulta beauty stores within more stores. And essentials grew in the mid-single digits, fueled by pet supplies and health items.

Comparable sales in discretionary merchandise categories softened significantly, but totaled nearly $3.5 billion, or more than 35% more than the same period in 2019. Sales of hard lines, a category that includes electronics , were down slightly year over year. Housing decreased by a low single digit. And apparel fell in the low single digits, despite growth in women’s fashion apparel sales.

Fiddelke said consumers vary by geography and income level, and look for value in different ways. For example, some are buying larger packages to save more per unit, or are trying one of Target’s lower-priced private labels instead of a national brand.

Cornell said Target is watching consumer spending closely. He said he is stocking popular items and ordering fewer products that shoppers may skip.

“We’re going to take a very balanced approach,” he said, making sure to “plan cautiously” in discretionary categories where the company has seen behavioral changes.

Turned on On a call with analysts Wednesday, Target’s chief growth officer Christina Hennington said the retailer has been talking to customers to get a better idea of ​​their mindset. As they feel inflation, they stretch the budget by taking advantage of promotions and consolidating trips to the store, he said. It found that Target shoppers still have spending power, but that “confidence in their personal finances continues to decline.”

As of Tuesday’s close, Target shares are down about 22% so far this year. Shares closed Tuesday at $180.19, up nearly 5% on the day after Walmart beat earnings expectations.


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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!