Target’s (NYSE:TGT) Q1 profit took a significant hit from inflationary pressure, including high freight and fuel costs. The retailer, citing unusually high transportation and fuel costs, lowered its operating margin guidance for Q2 in June (from about 5.3% to around 2%). Adding to its woes, Jefferies analyst Stephanie Wissink lowered her 2H22 and 2023 estimates, expecting more pain ahead. Wissink recommends a Hold on TGT stock with a price target of $161.
Wissink stated, “In the context of profit warnings from peers & suppliers and pressure on discretionary wallets, we’re force adjusting our 2H and 2023 estimates lower.”
The analyst expects TGT to deliver EPS of $7 and $10.40 in 2022 and 2023, down from the previous forecast of $8.98 and $12.85, respectively.
The drastic cut in estimates shows that TGT’s profitability could remain under pressure. Wissink stated that a longer inventory clearance time, higher markdowns and promotions, and lower discretionary spending would weigh on its operating margins.
Though the analyst expects TGT’s investments in price, stores, and omnichannel platform to support growth and drive market share gains, she is “not quite willing to underwrite similar performance in the event of a downturn.”
It’s worth mentioning that TGT stock has dropped about 23% since it reported Q1 earnings and warned about higher costs eating into its margins.
During the Q1 conference call, Target announced that it expects about $1 billion in incremental freight costs for the full year. Besides higher freight costs, volatility in consumer demand and supply chain issues will likely remain a drag.
While Target battles higher costs and demand uncertainty, it is taking measures to drive sales and improve margins. It is right-sizing its inventory for the balance of the year. Meanwhile, it is focusing on pricing action to counter higher freight and fuel costs.
Furthermore, it is focusing on strengthening the high-frequency categories like Food & Beverage and pursuing aggressive cost control measures. Moreover, to address the supply-chain pressure, it is adding additional capacity by opening five new distribution centers in the next couple of years.
Whether these measures help Target bounce back to its prior operating margin levels is a wait-and-watch story. Meanwhile, analysts’ ratings show they remain cautiously optimistic about TGT stock.
It has received 19 Buy and nine Hold recommendations for a Moderate Buy rating consensus. Further, analysts’ average price target of $184.75 implies 11.5% upside potential.