Target Offering A Rare Buying Opportunity After Earnings

Key Points

• Shares disappoint in the short term, but the long-term opportunity remains bullish. 
• They’ve now hit strong resistance three times around the $180 mark. 
• Further selling from here will strengthen the long argument. 

Target Corporation’s NYSE: TGT shares were down more than 4% in Wednesday’s session, despite the retailer beating the headline expectations in their earnings report yesterday. As initial reactions go to quarterly updates, you’d be forgiven for thinking it was an odd one, but on the whole, the numbers were underwhelming. 

Shares had been cooling in recent weeks after the 30% run they’d made through January, and investors would have been watching closely to see if the numbers were good enough to break out of the resistance around $180. But more on that later. For now, let’s take a look at the most up-to-date numbers and see what could make Target’s lackluster reaction actually quite appealing. 

Fresh Numbers

Starting with topline revenue, this was well ahead of the consensus and just about showed some growth compared to the same quarter last year. Bottom-line earnings were also hot and well in the black at $1.89 a share. Adjusted EBITDA was $1.87 billion versus the $1.64 billion analysts had forecasted, while all five of Target’s core merchandise categories delivered unit share growth. 

Beyond this point, things took a turn, which helps explain their drop today. Operating profit was down just short of 45% year on year, and crucially the company’s forward guidance for their earnings was well off the mark. For context, management is now expecting GAAP EPS and adjusted EPS to both ranges between $7.75 to $8.75 versus the previous consensus of $9.28. This shortcoming shocked investors who were preparing for the stock to start trading in the $200s for the first time since last May. 

Soft consumer spending was blamed for the drop in Target’s operating profit and their weaker guidance, but the company’s execs went out of their way to say there were erring on the side of being cautious with the year ahead. The teams from both Morgan Stanley and Bank of America came out with neutral statements on the results but with optimistic long-term views on the stock. The former regarded the lowered guidance as a little too cautious, which opens the door to an upside surprise in the next report, while the latter highlighted Target’s “strong omnichannel execution, improving inventory position and discount store decade exposure”.

The company expects that its operating margin will climb to, and move beyond, its pre-pandemic rate of 6% over the next three years. This would be an impressive achievement, all the more so if they do it by the end of 2024, as predicted.

Getting Involved

So how can investors make money here? On the one hand, you have a discount retailer that has proven itself to be fairly recession-proof, that’s down a little but still basically treading water after an underwhelming report. It’s only recently bounced up hard from long term support, and if it weren’t for disappointments yesterday, you have to be thinking shares would have gotten back on the trend they started the year with. They’ve now touched and turned from $180 a full three times since last August, and look set to keep cooling for at least the rest of the week. 

But for those with a longer-term view, this should open up an interesting buying opportunity. With signs that inflation is set to peak this year and the ongoing dip in consumer spending, this could be as bad as it gets from a macro perspective. If you’re a longer-term optimist on the economy as a whole, then Target looks quite cheap down here. Let’s see how far shares drop before the bulls step back in and be ready to pounce when they do.