It has been about a month since the last earnings report for Target (TGT Quick QuoteTGT - Free Report) . Shares have lost about 4.7% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Target due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Target Q2 Earnings Miss & Decline Y/Y, Margins Hit Hard

Target Corporation 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 right size 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 $3.64 per share 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.

The company witnessed low double-digit comps in food & beverage. While beauty was up in high-single digits, essentials were up in mid-single digits. Both apparel and home categories declined in low-single digits, while hardlines fell slightly year over year.

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.

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%.

During the quarter, Target opened five new stores. The company remains on track to add about 24 new store locations in 2022. Remodel of 1,000 stores completed since 2017.

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.

Target expects third-quarter operating margin rate to be well below the prior-year period, given ongoing inventory clearance and promotional activity. It foresees fourth-quarter operating margin in the range of 6.5-6.8%.

Other Financial Details

Target 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. Management intends to spend $5 billion or more in the current fiscal year to continue scaling operations, reaching new guests as we build capacity and enhance services.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

The consensus estimate has shifted -10.99% due to these changes.

VGM Scores

Currently, Target has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Target has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.