Target’s (NYSE: TGT) fiscal first-quarter earnings miss not only pulled down the stock by 25% on a single day, but also triggered a sell-off for several other retail stocks. Waning of pandemic-led tailwinds coupled with macro woes, including inflation and supply chain troubles, took a toll on Target’s Q1’ FY22 (ended April 30, 2022) results. Target shares are down 35% year-to-date.
With macro pressures expected to persist, will Target stock recover from current levels?
Dismal Q1 Profitability
Target’s revenue grew 4% to $25.2 billion in Q1 FY22 with comparable sales rising 3.3% on top of the 22.9% growth seen in the prior-year quarter due to pandemic-induced demand. Top-line growth was driven by strength in food and beverage, essentials, and beauty categories, partially offset by a slowdown in apparel, home, and hardline products.
Shifts in consumer spending from goods to travel and experiences following the reopening of the economy led to excess inventory at Target, especially for categories like kitchen appliances, TVs, and outdoor furniture.
Investors were disappointed to note a 430 basis-point gross margin contraction due to merchandising actions (inventory impairments, rightsizing and markdowns), higher freight costs, and increased supply chain costs. Lower gross and operating margins led to a 41% decline in Target’s Q1 adjusted EPS to $2.19.
Target expects cost pressures to persist and has lowered its FY22 operating margin guidance to around 6%, compared to the previous outlook of 8% or higher. The company continues to expect revenue growth in the low to mid-single-digit range in FY22.
Wall Street’s Take
Following the print, Bank of America Securities analyst Robert Ohmes lowered his price target on Target stock to $235 from $289, but maintained a Buy rating.
Ohmes lowered his estimates to reflect continued cost pressures, particularly in Q2 FY22. That said, the analyst believes that food inflation should continue to benefit traffic and comparable sales given Target’s competitive positioning in grocery and a strong value proposition. Ohmes feels that the stock’s valuation remains attractive.
MKM Partners analyst William Kirk slashed his price target on Target to $180 from $253 and reiterated a Hold rating on the shares. Kirk feels that the retailer’s profitability issues can be attributed to difficult macro conditions compounded by the company’s poor execution, whereas rival Walmart’s (WMT) pressures are mainly due to the macro environment.
Kirk also noted that consumers are now opting for discretionary experiences and services over discretionary goods, and Target is carrying “too much discretionary goods inventory.”
Overall, the Street is cautiously optimistic on Target stock, with a Moderate Buy consensus rating based on 18 Buys and seven Holds. The average Target price target of $199.25 suggests 32.88% upside potential from current levels.
Conclusion
Several analysts continue to be optimistic about Target’s long-term growth prospects based on its value offerings, continued expansion of store footprint, and enhanced omnichannel capabilities.
However, inflationary pressures and supply chain issues are expected to hurt Target’s near-term performance, and consequently any potential recovery in the stock.
On the TipRanks’ Smart Score system, Target gets a 4 out of 10, which indicates that the stock is likely to perform in line with the broader market.
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