Earnings Results: Target stock tumbles after ‘rapidly softening demand’ leads to another big profit miss

The disappointing results and outlook were in stark contrast to those of rival Walmart Inc.
WMT,
+0.72%,
which beat earnings expectations by a wide margin and raised its full-year outlook to send its stock to a six-month high. It also shows that the actions Target took earlier in the year to address an inventory glut still hasn’t bolstered the bottom line.

Target’s stock sank 13.1% to $155.47 on volume of 36.7 million shares, which was more than seven-times the full-day average. It had run up 17.0% over the past four sessions, in anticipation of upbeat results.

The company reported net income for the quarter to Oct. 29 that fell to $712 million, or $1.54 a share, from $1.49 billion, or $3.04 a share, in the same period a year ago.

Excluding nonrecurring items, adjusted earnings per share fell 49.1% from a year ago to $1.54, well below the FactSet consensus of $2.13. The EPS miss, by 27.7%, followed a 45.5% miss in the second quarter and a 28.6% miss in the first quarter, according to FactSet data.

“In the latter weeks of the quarter, sales and profit trends softened meaningfully, with guests’ shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty,” said Chief Executive Brian Cornell. “This resulted in a third-quarter profit performance well below our expectations.”

Total revenue grew 3.4% to $26.52 billion, above the FactSet consensus of $26.41 billion.

Same-store sales increased 2.7%, to top expectations for a 2.2% rise. The sales growth was driven by a 1.4% increase in traffic and an average ticket that was higher by 1.3%.

Stifel Nicolaus analyst Mark Astrachan said Target’s same-store-sales underperformance relative to Walmart’s — up 2.7% versus Walmart’s up 8.2% — is due primarily to Target’s “significantly greater” exposure to discretionary categories and much smaller grocery business. About 20% of Target’s sales are in the food and beverage categories, while 56% of Walmart’s sales are grocery, Astrachan said.

And Cowen’s Oliver Chen said that given same-store sales had swung from growth in the high-single-digit percentage range to a decline of low-single-digits, just within October, a consumer discretionary recession is now likely.

Cost of sales increased more than total sales, rising 8.1% to $19.68 billion. The gross margin rate contracted to 24.7% from 28.0%, as higher markdown rates, inventory shrink and higher merchandise and freight costs offset retail price increases.

Also weighing on gross margins were increased compensation and headcount in distribution centers.

On a bright note, the value of inventory held was $17.12 billion as of Oct. 31, up 14.4% from a year ago. But that marked a sharp improvement from the prior quarter, when inventory was up 36.1% from the year before.

Looking ahead, the company said fourth-quarter same-store sales are expected to decline in the “low-single-digit” percentage range, which contrasted with the FactSet consensus for a 3.1% rise.

The company said its outlook is based on “softening sales and profit trends that emerged late in the third quarter and persisted into November.”

Separately, Target announced an action plan to simplify and boost efficiencies across its business, in an attempt to proactively deal with “rapidly softening demand and elevated uncertainty.” The company said it believes the plan can save a total of $2 billion to $3 billion over the next three years.

Target’s stock has lost dropped 11.3% over the past three months, while shares of rival Walmart have gained 6.4%. Meanwhile, the SPDR Consumer Discretionary Select Sector exchange-traded fund
XLY,
-1.53%,
of which Target’s stock is a component, has dropped 16.7% the past three months and the S&P 500 index
SPX,
-0.83%
has declined 7.4%. (Walmart’s stock is a component of the SPDR Consumer Staples Select Sector ETF
XLP,
+0.49%,
which has slipped 3.9% the past three months.)