Back to top

Image: Bigstock

Target's (TGT) Q1 Earnings Miss Estimates, Margins Hit Hard

Read MoreHide Full Article

Target Corporation (TGT - Free Report) came up with first-quarter fiscal 2022 results, wherein the top line beat the Zacks Consensus Estimate and grew year over year. Comparable sales increased for the 20th successive quarter, gaining from growth in both store and digital channels. However, supply-chain bottlenecks and higher freight costs continued to hurt margins, and in turn the bottom line. The quarterly earnings missed the consensus mark and fell sharply from the year-ago period. Consequently, management trimmed the fiscal 2022 operating margin rate.

Sales & Earnings Picture

Target reported adjusted earnings of $2.19 per share that fell short of the Zacks Consensus Estimate of $3.00 and declined 40.7% from the year-ago period.

The big-box retailer generated total revenues of $25,170 million that increased 4% year over year and beat the Zacks Consensus Estimate of $24,528 million. We note that sales jumped 4% to $24,830 million, while other revenues rose 6.7% to $340 million.

Stores fulfilled more than 95% of the company’s sales in the quarter. Same-day services (Order Pick Up, Drive Up and Shipt) grew approximately 8%, led by Drive Up, which grew in the mid-teens. Target registered sturdy performance in food & beverage, essentials and beauty categories. During the quarter, the company opened five new stores and added three sortation centers to serve customers efficiently.

Meanwhile, comparable sales for the quarter under discussion increased 3.3%, backed by 3.9% jump in the number of transactions. Average transaction amount fell 0.6%. Again, comparable store sales grew 3.4%, while comparable digital sales increased 3.2%.

Target’s debit card penetration contracted 50 basis points (bps) to 11.6%, while credit card penetration increased 30 bps to 8.7%. Total REDcard penetration declined to 20.3% from the year-ago quarter’s 20.5%.

Target Corporation Price, Consensus and EPS Surprise

Target Corporation Price, Consensus and EPS Surprise

Target Corporation price-consensus-eps-surprise-chart | Target Corporation Quote

Margins

Gross margin decreased 430 basis points to 25.7%, reflecting costs related to freight, supply chain bottlenecks, and increased compensation and headcount in distribution centers. Again, higher markdown rates owing to inventory impairments and measures taken to address softer-than-anticipated sales in discretionary categories hurt margin as well. Meanwhile, operating margin shriveled 450 basis points to 5.3%, and came well below management’s expectations.

Other Financial Details

During the quarter, Target paid dividends of $424 million. This reflected an increase of 32.4% in the dividend per share. The company repurchased shares worth $10 million, thereby retiring 0.1 million shares at an average price of $208.60. At the end of the quarter, excluding the outstanding Accelerated Share Repurchase of $2.75 billion, the company had roughly $12.3 billion remaining under its share-buyback program approved in August 2021.

This Zacks Rank #2 (Buy) company ended the quarter with cash and cash equivalents of $1,112 million, long-term debt and other borrowings of $13,379 million and shareholders’ investment of $10,774 million.

Outlook

Management envisions second-quarter fiscal 2022 operating margin rate to be centered around first quarter's operating margin rate of 5.3%.

Target reaffirmed low-to-mid-single digit revenue growth in fiscal 2022. However, it now foresees fiscal operating margin rate to be centered around 6% down from earlier projection of 8% or higher.

Brian Cornell, CEO of Target said, “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.”

We note that shares of this Minneapolis, MN-based company have fallen 14.2% in the past six months compared with the industry’s decline of 10.2%.

3 Stocks Hogging the Limelight

We have highlighted three other top-ranked stocks, namely Costco (COST - Free Report) , Kroger (KR - Free Report) and Tractor Supply Company (TSCO - Free Report) .

Costco, which operates membership warehouses, carries a Zacks Rank of 2 at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. COST has a trailing four-quarter earnings surprise of 13.3%, on average.

The Zacks Consensus Estimate for Costco’s current financial year sales and EPS suggests growth of 14% and 18%, respectively, from the corresponding year-ago period’s actuals. COST has an expected EPS growth rate of 9.1% for three-five years.

Kroger, the renowned grocery retailer, carries a Zacks Rank #2 at present. The company has an expected EPS growth rate of 9.9% for three-five years.

The Zacks Consensus Estimate for Kroger’s current financial-year sales and EPS suggests growth of 3.2% and 4.1%, respectively, from the year-ago reported numbers. KR has a trailing four-quarter earnings surprise of 22.1%, on average.

Tractor Supply Company, a rural lifestyle retailer in the United States, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 12.4%, on average.

The Zacks Consensus Estimate for Tractor Supply Company’s current financial year sales and EPS suggests growth of 8.8% and 10.2%, respectively, from the year-ago period. TSCO has an expected EPS growth rate of 9.8% for three-five years.