Target Follows Walmart Lower In A Downward Spiral Of Inflation

Inflation Takes A Bite Out Of Target’s Bottom Line 

Target (NYSE: TGT) reported earnings and the news mirrors what we heard from Walmart (NYSE: WMT). The company was able to sustain YOY growth but on the back of higher prices and yet inflation still took a big bite out of the bottom line. The news has the stock down a full 20% percent in premarket trading and it looks like even lower prices are on the way. The key takeaway from the report is that earnings power is far less than forecast which means the analysts will lower their targets for earnings if not the rating and price target on the stock. 

We haven’t seen any analyst's commentary yet but we suspect the sentiment is peaking. The Marketbeat.com consensus rating is a firm Buy but the price target hasn’t budged in almost 90 days. Based on the Q1 results and outlook, we think the consensus price target will begin moving lower very soon. 

Target Whiffs As Inflation Pressures Margin 

Target had a difficult quarter impeded by systemic headwinds, tough comps, and the absence of stimulus tailwinds. The company reported $25.17 billion in net revenue for a gain of 4.0% over last year but the bottom line results are terrible. The revenue beat the consensus by $0.690 billion or about 280 basis points but rising costs and inventory clearing actions reduced the GAAP and adjusted earnings by more than 40% each. On a comp basis, comps are up 3.3% with store sales up 3.4% and digital sales up 3.2%. On a two-year basis, comps are up 22.9%. 

“Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time. Despite these near-term challenges, our team remains passionately dedicated to our guests and serving their needs, giving us continued confidence in our long-term financial algorithm, which anticipates mid-single-digit revenue growth, and an operating margin rate of 8 percent or higher over time,” said CEO Brian Cornell in the press release. 

The margin news is where Target’s results really hurt, the company reported an operating margin of only 5.3% compared to the 8%+ long-term target. This resulted in GAAP EPS of $2.16 and adjusted EPS of $2.19 which missed the Marketbeat.com consensus figure by $0.87 and the bad news does not end there. The company is maintaining its FY revenue guidance for growth in the low to mid-single-digits but the margin will not improve significantly. Target execs are forecasting a flat margin in Q2 and a slight 70 basis point improvement by year-end which is OK, but we see downside risk in the outlook. Inflation is still ramping, the Fed ramping the rate hike outlook, and the odds of a recession are growing. 

The Technical Outlook: Yield And Valuation May Not Be Enough For Target 

Target is a value trading at 14X its earnings(pre-release) and yielding 2.0% but that may not be enough to hold up the price action. The premarket action has prices moving lower following the previous day's decline and the indicators are pointing to a continuation of the near-term downtrend. The $210 level is an important support level and is already broken with price action falling to the post-pandemic low. If there is no rebound in price action today, we see this stock falling down to the $120 level or lower.