Updated on June 9, 2022: American big box retailer Target Corporation (NYSE: TGT) unnerved investors with its latest plans focused on inventory optimization. Shares plunged over 7.5% in early trading as the market drowned in the news, and ended the day down 2.3%.
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Retailers worldwide are grappling with the ill effects of excess inventory, coupled with fading consumer demand amid the record-high inflationary environment. Target was no exception and registered dismal first quarter results, which dragged the stock down nearly 25% on the day. TGT stock has lost 31.9% so far this year.
Target’s Preemptive Steps
Target said it will take a haircut to its profits for the fiscal year 2022 as it is marking down stock, ridding off excess inventories, and also canceling orders. Moreover, the retailer also plans to add incremental holding capacity near U.S. ports to circumvent the macro issues of logistics, increased transportation costs, and record high fuel prices.
Target expects its Food & Beverage, Household Essentials, and Beauty segments to show continued momentum. Meanwhile, discretionary segments like Home are expected to underperform.
Due to the unfavorable macro headwinds, Target now expects its second quarter operating margin to range around 2%, much lower than its previous guide of ranging around 5.3%. Meanwhile, in the second half of the year, Target said its margins will improve back to around 6%.
On the bright side, however, the department store reiterated its revenue guidance to grow “in the low-to mid-single digit range, and expects to maintain or gain market share in 2022.”
Commenting on the announced changes, Brian Cornell, Chairman and CEO of Target, said, “The additional steps we are announcing today will ensure that we deliver for our guests while driving further growth. While these decisions will result in additional costs in the second quarter, we’re confident this rapid response will pay off for our business and our shareholders over time, resulting in improved profitability in the second half of the year and beyond.”
Cornell also clarified his decisions by stating that “unloading excess inventory is a necessary pain,” which the company will have to undertake.
Furthermore, at Target’s annual shareholder’s meeting held yesterday, executives noted that “While we’ve continued to see strong traffic and sales growth since we reported our first quarter results we’ve watched as many competitors have reported elevated inventory levels,” and accordingly, the retailer has decided to take several steps to further right-size its inventory.
Stock Prediction
Target’s announcement did not alarm the analysts, many of whom responded with a reiterated Buy rating on TGT stock. Guggenheim analyst Robert Drbul also maintained his Buy call but lowered the price target to $185 (18.1% upside potential) from $225.
Drbul’s downward revision in price target is implied as the analyst lowered his FY22 and FY23 earnings estimates to reflect the burden of the increased costs associated with the new initiatives.
“Underlying sales trends at Target remain solid and while we expect elevated costs and supply chain challenges to impair the company’s near-term profitability, we continue to believe Target remains positioned to gain share with its omni-channel strategies. The company’s strategy (store growth and expanding digital fulfillment capacity in stores) has proven out, continues to gain traction, and appears set for continued success well into 2022/23, in our view,” Drbul added.
The Wall Street community is cautiously optimistic about the stock with a Moderate Buy consensus rating based on 17 Buys and nine Holds. The average Targe price forecast of $183.88 implies 17.4% upside potential to current levels.
Ending Thoughts
Retailers are undoubtedly under tremendous pressure to perform. No wonder Target has taken proactive steps to face the headwinds and could emerge as a winner after the worst is behind us. However, currently, corporate insiders and hedge funds are decreasing their holdings of Target stock while retail investors are increasing their exposure.
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