Target’s Warning Is Dire News For The S&P 500

The COVID-19 Rebound Is Crushing Target’s Margin

After, oh, a year or so of aggressively working to mitigate supply chain and inventory problems Target (NYSE: TGT) has a new problem. The company is now sitting on record levels of inventory and it is growing which has led the company to work aggressively in the opposite direction. What this means is the age of full-price selling, reduced promotional activity, and widening margins is over. For Target, it means a greater-than-200 basis point contraction in margin guidance that has shares moving lower in premarket action. The takeaway for the market is that virtually every company on the planet has been working hard to mitigate inventory, inventories have been on the rise, and this story is going to be echoed from sector to sector and industry to industry. 

“We thought it was prudent for us to be decisive, act quickly, get out in front of this, address and optimize our inventory in the second quarter — take those actions necessary to remove the excess inventory and set ourselves up to continue to be guest relevant with our assortment,” CEO Brian Cornell said in a televised interview. 

The risk for the company and investors lie in where inventory is highest. The company’s plan is to clear unwanted merchandise, items that are already not selling, in order to make room for items that do. In this scenario, there is a chance the company will not be able to sell the excess even with discounts and that additional markdowns or write-offs could follow. And there will be ripples throughout the economy due to canceleed orders, those ripples could easily turn into a tidal wave if other retailers and/or the retail sector, in general, follow suit. 

The Outlook For Earnings Is In Decline, Led By The Discretionary Sector

The outlook for 2Q earnings growth among the S&P 500 was already in decline and we see that trend accelerating now. The consensus for 2Q growth is down 290 basis points and falling, led by the Discretionary Sector (NYSEARCA: XLY) and this is saying something. The Energy Sector is offsetting a lot of the weakness due to the rise in gas prices, the consensus for growth in that sector is up 6400 bps since the start of the quarter and it is still rising. On a sector basis, the consensus for growth in the Discretionary Sector has already fallen more than 2000 basis points since the start of the quarter reversing an expected YOY gain and turning it into a decline. This is having an impact on the full-year sector-level consensus as well which is down1350 bps since the start of the quarter. 

The good news is that Target sees a light at the end of the tunnel. The company is expecting back-half improvements and was able to maintain the FY guidance. The analysts haven’t had time to issue any commentary but we see it coming. The trend coming into this news was downward, however, and we see that continuing. The Marketbeat.com consensus rating is a Buy but it is a weak Buy and has been slipping over the past year as has the consensus price target. The average price target of $215 is 35% above the most recent close but down in the 12, 3, and 1-month comparisons and well off of the peak set earlier this year. 

The Technical Outlook: Target’s COVID-Bump Is Deflating 

Target shares got a nice bump from the COVID-19 trends and stimulus and that bump is deflating. The price action is down 10% in premarket trading and at the low of the recent range. Based on the past month or so of activity, we view the move as very bearish and have a close eye on the $145 support target. If this level can not hold price action a move down to the $120 level or lower is expected.