Target Corporation ( TGT Quick Quote TGT - Free Report) came up with second-quarter fiscal 2022 results, wherein the top line fell short of the Zacks Consensus Estimate but grew year over year. Comparable sales increased for the 21st successive quarter, gaining from growth in both store and digital channels. However, higher markdown rates and increased freight costs continued to weigh on margins. Management’s actions to tackle the excess inventory hurt profitability. As a result, the bottom line missed the consensus mark and fell sharply from the year-ago period. This was the second straight earnings miss. Target’s recent attempt to rightsize its inventory is a step in the right direction, as demand skews toward frequency categories like Food & Beverage, Household Essentials and Beauty from discretionary categories. This may hurt margins now but better positions the company to gain market share. Markedly, the Fall season’s receipts in discretionary categories were lowered by more than $1.5 billion. Sales & Earnings Picture
Target reported adjusted earnings of 39 cents a share, which fell short of the Zacks Consensus Estimate of 71 cents and our estimate of 75 cents. Also, the bottom line declined significantly from the $3.64 reported in the year-ago period.
The big-box retailer generated total revenues of $26,037 million, which increased 3.5% year over year but came lower than the Zacks Consensus Estimate of $26,159 million and our estimate of $26,222.1 million. We note that sales jumped 3.3% to $25,653 million, while other revenues rose 14.8% to $384 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 11%, led by Drive Up, which grew in the mid-teens. Target registered a sturdy performance in the Food & Beverage, Beauty and Household Essentials categories. During the quarter, the company opened five new stores. Meanwhile, comparable sales for the quarter under discussion increased 2.6% but fell short of our estimate of 3.7%. The comparable sales growth reflected a 2.7% increase in traffic. Again, comparable store sales grew 1.3%, while comparable digital sales increased 9%. Target’s debit card penetration contracted 40 basis points to 11.2%, while credit card penetration increased 20 basis points to 8.9%. The total REDcard penetration declined to 20.1% from the year-ago quarter’s 20.3%. Margins
The gross margin decreased 890 basis points to 21.5%, reflecting higher markdown rates due to inventory impairments and measures undertaken to address softer-than-anticipated sales in discretionary categories as well as higher merchandise, inventory shrink and freight costs. Additionally, the increased compensation and headcount in distribution centers, the cost of managing the excess inventory and higher per-unit last-mile shipping costs also hurt the gross margin rate. Meanwhile, the operating margin shriveled to 1.2% from 9.8% in the year-ago period.
Other Financial Details
This Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $1,117 million, long-term debt and other borrowings of $13,453 million and shareholders’ investment of $10,592 million. During the quarter, Target paid out dividends of $417 million. This reflected an increase of 32.4% in the
dividend per share. Outlook
Target reaffirmed low-to-mid-single-digit revenue growth in fiscal 2022. It foresees the operating margin rate to be centered around 6% in the back half of the year.
We note that shares of this Minneapolis, MN-based company have risen 11.5% in the past three months compared with the industry’s rise of 19.6%. 3 Hot Stocks
Here we have highlighted three better-ranked stocks, namely
Dollar General ( DG Quick Quote DG - Free Report) , Costco ( COST Quick Quote COST - Free Report) and Dollar Tree ( DLTR Quick Quote DLTR - Free Report) . Dollar General, a discount retailer, currently carries a Zacks Rank #2 (Buy). DG has an expected EPS growth rate of 12.8% for three to five years. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. The Zacks Consensus Estimate for Dollar General’s current financial-year revenues and EPS suggests growth of 10% and 13.4%, respectively, from the year-ago reported figure. Dollar General has a trailing four-quarter earnings surprise of 2.8%, on average. Costco, which is engaged in the operation of membership warehouses, carries a Zacks Rank #2. COST has an expected EPS growth rate of 9.2% for three to five years. The Zacks Consensus Estimate for Costco’s current financial-year sales and EPS suggests growth of 15.4% and 18.2%, respectively, from the year-ago period. COST has a trailing four-quarter earnings surprise of 9.7%, on average. Dollar Tree operates discount variety retail stores. The stock currently carries a Zacks Rank #2. DLTR has an expected EPS growth rate of 15.5% for three to five years. The Zacks Consensus Estimate for Dollar Tree’s current financial-year revenues and EPS suggests growth of 6.7% and 40.7%, respectively, from the year-ago reported figure. DLTR has a trailing four-quarter earnings surprise of 13.1%, on average.