Target misses its lowest profit estimate, yet predicts rebound

Bloomberg

Target Corp is betting heavily on a dramatic financial comeback the rest of this year after badly trailing its own forecast as well as Wall Street’s estimates in the second quarter.
The retailer stuck with its outlook for operating income of about 6% of sales during its
fiscal second half after taking a painful hit from aggressive moves to reduce inventory.
During the three months ending in late July, the operating margin slumped to 1.2%, lower than the 2% forecast Target issued in June when it slashed its profit outlook.
The earnings plunge — an unflattering contrast to Walmart Inc’s upbeat results — reflected Target’s moves to slash inventories of discretionary items and pivot to essentials as soaring US inflation forces shoppers to pay more for groceries. Target executives argued that their efforts to pare bloated stockpiles of kitchen appliances, patio furniture and other durable goods basically worked, despite the hit to profits.
“The vast majority of the financial impact of these inventory actions is now behind us,” Chief Executive Officer Brian Cornell said on a conference call with analysts. “We’re positioned to deliver a strong improvement in our profitability this fall.”
“It’s clear the cost to clear excess product was even higher than management anticipated, and there is still plenty of work to do,” Edward Kelly, an analyst at Wells Fargo & Co, said. “Near-term uncertainty remains, but we saw nothing to change our positive view around the 2023 recovery story.”
Still, Target’s decision to stand by its operating-margin forecast for the second half “leaves the door open for more disappointments,” said Paul Lejuez, an analyst at Citigroup Inc.
Target, which gets more of its revenue from discretionary items than Walmart, has been bulking up on basic products while marking down home goods. The company reported strong second-quarter demand for food and beverages, household essentials and beauty products.
Indeed, while the mix of sales is changing to favor basic goods, consumers are still spending. During the fiscal second quarter, total revenue climbed 3.5% to $26 billion, Target said in a statement. That topped analysts’ estimate of $25.8 billion. Comparable sales rose 2.6%, driven by a 2.7% increase in traffic, while the average transaction amount was flat.
“We continue to see a very healthy US consumer,” Cornell said.
US retail-sales data for July backed that up, with gains in categories other than autos and gasoline suggesting continued consumer resilience.
But for Target, markdowns hammered the bottom line, and the company also took a hit from freight costs.