Earnings target exceeded, but company warns of current quarter and calls on consumers to be cautious

Target’s (TGT) first quarter was not a direct hit as shoppers continued to be hesitant to head to the store’s more discretionary departments amid high inflation and a sluggish economy.

“We entered 2023 with clear eyes on what consumers face with persistent inflation and rising interest rates,” Target Chairman and CEO Brian Cornell said on a call with journalists. “We were determined to build on the trust of our customers by uniting as one team to deliver affordable joy every day as consumers and businesses navigate a third straight year of dynamic challenges.”

The impact of the various economic counter-currents was not difficult to spot in the publication of the results of Target.

Target called the “softness” in discretionary merchandise such as apparel and home goods. Comparable digital sales fell 3.4% from a year ago. The company also did not repurchase any of its shares during the quarter.

The retailer also guided second-quarter earnings below analysts’ estimates, setting a cautious tone for the potential start of the key back-to-school shopping season.

Cornell remains optimistic, however the second half brings better news.

“I think the combination of the traffic we’re seeing, the relationship we’ve built with customers, the flexibility that the actions we’ve taken on inventory give us in the second half of the year, and that great combination of new trending merchandise and the consistent trends we see in food and beverage, household essentials and beauty give us a lot of confidence that we can navigate a tough consumer environment with the right agility and flexibility to continue to meet customer needs,” Cornell told Yahoo Finance on the call.

Summary of earnings

  • Net sales: +0.6% year-over-year to $25.3 billion vs. estimate of $25.18 billion

  • Gross margin: 26.3% vs. 25.7% a year ago and estimates of 26.52%

  • Inventory growth: -16% year over year vs. estimate of -5.1%

  • Diluted EPS: -6.2% YoY to $2.05 vs $1.80 estimate

CHICAGO, ILLINOIS - NOVEMBER 16: Shopping carts are lined up outside a Target store on November 16, 2022 in Chicago, Illinois.  Shares of Target fell today after the company reported a 52% drop in profits in the third quarter.  (Photo by Scott Olson/Getty Images)

CHICAGO, ILLINOIS – NOVEMBER 16: Shopping carts are lined up outside a Target store on November 16, 2022 in Chicago, Illinois. (Photo by Scott Olson/Getty Images)

What else caught our attention

  • Inventories fell 16% from a year earlier, due to a 25% reduction in inventory of discretionary categories such as clothing and home goods.

  • Comparable digital sales fell 3.4% compared to a 3.2% increase in the prior year quarter.

  • Beat Wall Street earnings estimates for the second straight quarter after three straight misses.

  • Earnings per share for the first quarter are in the range of $1.30 to $1.70 versus an estimate of $1.96.

  • Annual earnings per share seen in a range of $7.75 to $8.75 (repeated) vs $8.36 estimate.

Vibe of pre-benefits on target

  • Year-to-date stock price performance: Objective +5.8% against +7.4% for the S&P 500 against +5.7% for Walmart.

  • One-year stock price performance: Target -28.2% vs. +3% S&P 500 vs. +2% Walmart.

  • Bank of America: “We maintain our neutral rating as we believe Target’s strong omnichannel positioning, decade-long discount store exposure and valuable multi-category assortment will be overshadowed by discretionary pressures.” -Analyst Robert Ohmes.

  • Jefferies: “Currently, Target is trading at 14.9x FY’24 P/E, 2.5x below its historical average. At this multiple, we believe Target is undervalued with an upside as fundamentals improve .” -Analyst Corey Tarlowe.

Brian Sozzi is the editor of Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Advice on the banking crisis? Email brian.sozzi@yahoofinance.com

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