Target (TGT) Q2 2022 Earnings: Earnings drop nearly 90%

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

Brendan McDermid | Reuters

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

The big-box retailer missed Wall Street’s expectations by a wide margin, even as the company itself lowered its guidance twice.

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

Shares of Target fell more than 2% in early trading.

CFO Michael Fiddelke defended Target’s aggressive inventory efforts. He said the retailer needed to move quickly to clear the clutter, prepare for the holidays and navigate an economic scenario clouded by inflation.

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

Here’s how Target compared to Refinitiv’s consensus estimates for the three months ended July 30:

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

Target has experienced a remarkable reversal of fortunes over the past two quarters. After posting impressive quarter after quarter sales numbers during the Covid pandemic, it has seen clothes, coffee makers, lamps and more on the shelf, then thrown on the clearance rack. Some of this excess merchandise is the same stuff that sold out in pre-pandemic episodes, when shoppers turned to home decor and loungewear.

The turnaround forced the big-box retailer to cut its profit forecasts twice, once in May and again in June, and pledged to move quickly to get its inventory levels to a healthier place.

Inventory was still high, however: $15.32 billion at the end of the second quarter, $15.08 billion at the end of the first.

But CEO Brian Cornell said on a call with reporters that the mix is ​​more favorable, with Target targeting high-frequency categories along with popular categories like grocery and home essentials, seasonal merchandise. It canceled more than $1.5 billion in lower-demand discretionary category orders.

Fiddelke said the inventory count is higher because of cost inflation and because it receives 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 per share, from $1.82 billion, or $3.65 per share, a year earlier.

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

Earnings for the quarter were squeezed in a number of ways. Sales of many commodities were less profitable as they declined. Freight, transportation and shipping costs rose as fuel prices rose. And the company had to increase the number of employees and cover more compensation in the distribution centers because it was dealing with a lot of extras.

A cautious approach

Big-box rival Walmart said Tuesday it had seen a significant shift in consumer behavior, with even wealthier households looking for deals on groceries and essentials. The company told CNBC that about 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 that it does not see that much of a change driven by inflation. Unit sales were up in all five of its main merchandise categories, with particular strength in two categories: food and beverage, and beauty and home essentials.

Even though profits were down, comparable sales and traffic were up.

Comparable sales, a key metric that tracks sales online and at stores open for at least 13 months, rose 2.6% in the second quarter, up from 8.9% last year. According to StreetAccount, this was above estimates for a 2.8% increase. Traffic at Target’s stores and on its website grew 2.7% year-over-year.

Fiddelke, the CFO, said that the increase in traffic evidence that shoppers have spending power and will help Target achieve a higher profit forecast for the back half of the year.

“The strength of that strong guest response positions us well, even though I can’t predict all the balls that will 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 double-digit sales growth, the company said. Beauty grew in high numbers as Target adds Ulta Beauty stores within more stores. And fundamentals grew in the mid-single digits, driven by pet supplies and healthcare items.

Comparable sales in discretionary sales categories softened significantly, but added nearly $3.5 trillion, or more than 35%, over the same period in 2019. Hardline sales, a category that includes electronics, were down slightly year over year. The house has been brought down by low figures. And apparel fell in low numbers, even as sales of fashion-forward women’s clothing grew.

According to Fiddelke, 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 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’s stocking up on popular items and ordering fewer goods that shoppers might skip.

“We will take a very balanced approach,” he said, making sure to “carefully plan” in discretionary categories where the company has experienced behavioral changes.

good On a call with analysts on Wednesday, Target’s chief growth officer Christina Hennington said the retailer has been talking to customers to better understand their mindset. As they feel inflation, they are stretching their budgets by taking advantage of promotions and consolidating trips to stores, he said. Target shoppers still have spending power, but “confidence in their personal finances continues to decline.”

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

Target (TGT) Q2 2022 Earnings: Earnings drop nearly 90%

Source link Target (TGT) Q2 2022 Earnings: Earnings drop nearly 90%

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