MW Target CEO says 'consumers continue to spend cautiously' amid triple-miss earnings report
By Tomi Kilgore and James Rogers
Stock heads for biggest one-day selloff in more than two years
Shares of Target Corp. took a dive Wednesday and headed for their worst day in more than two years after the retail giant reported a triple miss for the fiscal third quarter and provided a downbeat outlook, citing "unique" challenges and costs.
Target $(TGT)$ also reported margins that fell due to higher digital fulfillment and supply-chain costs resulting from the costs of managing higher inventory levels and increased digital sales volumes.
"We saw several strengths across the business, including a 2.4% increase in traffic, nearly 11% growth in the digital channel, and continued growth in beauty and frequency categories," said Chief Executive Brian Cornell. "At the same time, we encountered some unique challenges and cost pressures that impacted our bottom-line performance."
Related: Target unveils Thanksgiving dinner offer priced at $20 for four people - $5 less than a year ago
Speaking during a conference call to discuss the results, Cornell pointed to the company's "healthy" traffic growth in the quarter, offset by an average ticket decline, as the CEO acknowledged headwinds. "Consumers continue to spend cautiously, most notably on discretionary items," he said.
"We're seeing many of the same themes that have defined the environment for some time," he added, citing "multiple years of price inflation."
Set against this backdrop, consumers are "waiting to buy until the last moment of need," he said, while also noting that consumers "sometimes allow themselves to splurge a little bit."
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Cornell also said the company's supply chain has faced some "unique challenges," citing the recent strike at U.S. East Coast and Gulf ports. Target, he said, faced higher-than-expected costs in its supply chain.
Michael Fiddelke, Target's chief operating officer, said that the company anticipated the port strike and took "decisive action to route key shipments to West Coast ports."
D.A. Davidson analyst Michael Baker thinks that better times are likely ahead. "The last four quarters have now gone Beat, Miss, Beat, Miss, indicating to us that Target is having a bit of difficulty navigating the current environment," he wrote, in a note released Wednesday. "To us, that is a function of a product positioning that is better suited to a more bullish spending environment."
Related: Target and Amazon will start offering holiday deals in October aimed at price-sensitive shoppers
"Although disappointed with this quarter, we do think the environment is improving and that should benefit TGT in 2025 and thus we are maintaining our Buy rating," he added.
"While the results are disappointing, and the company is losing market share to competitors, we continue to believe the compelling merchandise in home and apparel will drive improved results longer-term," wrote Edward Jones analyst Brian Yarbrough, in a note released Wednesday. "We expect it will take some time to improve sales in a very competitive environment, but we continue to believe the company has solid long-term growth potential."
The stock plunged in premarket trading on Wednesday and was down 21.8% at 3:43 p.m. Eastern. It was also headed for the biggest one-day selloff since it plummeted 24.9% on May 18, 2022.
Net income for the quarter to Nov. 2 dropped to $854 million, or $1.85 a share, from $971 million, or $2.10 a share, in the same period a year ago. That was well below the FactSet consensus for earnings per share of $2.30.
Related: Here's why the biggest retailers are crushing smaller chains in a tough economy
Total revenue grew 1.1% to $25.67 billion but was below the FactSet consensus of $25.88 billion, marking the first top-line miss in five quarters and the second miss in 11 quarters.
Comparable sales, or sales of stores open at least 13 months, were up 0.3%, which also missed expectations of a 1.5% increase.
Digital comparable sales rose 10.8%, while same-day delivery services saw nearly 20% growth.
Related: Target closed crime-prone stores and it appears to have paid off. Why that may result in future 'retail deserts.'
Gross margin fell to 27.2% from 27.4%, while the operating income margin rate declined to 4.6% from 5.2%.
Looking ahead, the company expects fourth-quarter adjusted EPS of $1.85 to $2.45, versus the current FactSet consensus of $2.65.
The stock is down 15% year to date, while the Consumer Staples Select Sector SPDR exchange-traded fund $(XLP)$ has gained 11.2% and the S&P 500 has advanced 23.9%.
-Tomi Kilgore -James Rogers
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November 20, 2024 15:51 ET (20:51 GMT)
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