Target reported earnings Wednesday morning amid questions on its turnaround strategy, tariff impacts and rising competition from Amazon.com. Target stock had been holding technical support as it climbed off an April low, but shares dived sharply in premarket trade.
The Minneapolis, Minn.-based retail giant reported a 20% drop in adjusted earnings, to $2.05 per share, vs. consensus views for $2.04. Results marked a fourth straight quarter of weakening profits, following EPS drops of 12%, 19% and 36%. Revenue came in at $25.21 billion. Analyst consensus called for a 2% decline to $24.936 billion, according to FactSet.
The company backed its prior adjusted EPS guidance of $7 to $9. The consensus target is $7.34.
The company release also announced that the board had elected Chief Operating Officer Michael Fiddelke as the company's next chief executive. Current CEO Brian Cornell will shift to the role of chairman. Both appointments will take effect on Feb. 1.
Heading into the earnings report, analysts were divided on the stock, with 10 of 38 analysts making buy recommendations, while 22 have hold ratings and the rest sell ratings, per FactSet.
On Monday, Evercore ISI added Target to its Tactical Outperform list, saying that Wall Street estimates are reasonable and company guidance is unlikely to be cut, according to TheFly.com. Evercore has an in-line rating with a 108 price target.
But Friday, Bank of America downgraded Target to underperform from neutral and cut the price target to 93 from 105. Analysts said Target is underperforming Walmart on a comparable-sales compound annual growth rate vs. 2019. Also, digital trends "look very challenged," TheFly.com reported.
BofA also cited increasing competitive threats from Walmart and Amazon, which earlier this month announced same-day delivery on groceries starting in more than 1,000 cities. Amazon plans to expand the service to more than 2,300 areas by the end of the year.
Target's Turnaround
In an Aug. 6 note to clients, UBS analyst Michael Lasser was confident that Target will generate significant profit outperformance thanks to improvement in inventory shrink and the timing of costs vs. price increases, plus other cost controls.
"We reside squarely in the camp that Target does not need some radical transformation," Lasser wrote. "Rather, it simply needs to be the best version of itself. This means offering its guests a consistently compelling value proposition. It needs to ensure that its shelves are robustly and regularly stocked with in-demand items. (Target) needs to constantly introduce new products to wow and delight its guests. It needs to take good care of its teammates so they take good care of its customers."
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While the impact of tariffs on consumers remains unknown, Lasser added, more tariff-related price increases should come through beginning this month.
Shopper visits to Target fell 3.1% during the second quarter, including a 3.9% drop in July visits, according to retail analysis firm Placer.ai. Year-over-year same-store visit declines have ranged from 2.2% to 9.7% since February.
"Like Walmart, Target's online growth has been a bright spot — last quarter, the company reported a 4.7% increase in digital comp sales, aided by more than 35% growth in same-day delivery," Placer.ai said in a report. "But this was not enough to offset a 5.7% decline in in-store comp sales."
Consumer backlash to Target's rollback of diversity, equity and inclusion (DEI) programs appears to have contributed to softening performance, the firm added. Meanwhile, "persistent challenges point to a more fundamental shift in consumer preferences amid discretionary cutbacks."
Target Stock Analysis
Overall, consumers remain resilient amid low unemployment — a silver lining for the retail sector. U.S. retail sales rose 0.5% in July and have edged higher in five of the past six months, according to Econoday.
Target stock has been rising steadily since it bottomed in April. It's traded above the 10-week moving average since June, and the line itself is back to an upward trend. The stock's 10% premarket loss early Wednesday was poised to break that trend, as well as support at the 10-week moving average.
The stock ended Tuesday still 6% below the 40-week moving average, which remains in decline. The Relative Strength Rating is a weak 16. Target stock is about 60% below its all-time high in November 2021.
