Target’s Q3 Earnings Exceed Expectations, but Revenue Falls Again

by Warren Seah

Target (ticker: TGT) has reported adjusted earnings of $2.10 per share for the third quarter, surpassing Wall Street’s projections of $1.47 per share, according to FactSet. This marks a 36% increase from the same quarter last year. However, despite the strong earnings, the company’s total revenue declined by 4.2% to $25.4 billion, the second consecutive quarter with a year-over-year sales decrease.

Lower Demand for Discretionary Goods Contributes to Revenue Decline

Target’s revenue decline can be attributed to a decrease in demand for discretionary items. The company’s same-store sales, which measure sales growth in stores that have been open for over a year, also experienced a decline of 4.9% compared to the previous year. This decline is slightly lower than the anticipated 5.3% decrease forecasted by analysts.

Fourth Quarter Outlook

Looking ahead to the fourth quarter, Target expects same-store sales to fall by mid-single digits. The company also projects adjusted earnings per share to range between $1.90 and $2.60. Analysts predict a 4.7% decline in same-store sales and earnings per share of $2.23.

CEO Brian Cornell Discusses Performance

During a call with reporters, CEO Brian Cornell acknowledged the company’s improved profitability in the third quarter but expressed dissatisfaction with the top-line trends. He emphasized that softer demand for discretionary items was a significant factor in the sales decline. Consumers are facing economic pressures resulting from rising interest rates, higher credit card debt, and lower savings cushions. This aligns with Home Depot’s recent results, which also showed a decrease in purchases of big-ticket items.

Impact on Target’s Share Price

Concerns over discretionary spending have continued to weigh on Target shares for several quarters. So far this year, the stock has declined by 26%.


Target Sees Signs of Demand Recovery

Despite a decline in sales, Target is optimistic about the future as demand begins to pick up. In the third quarter, the company observed an improvement in sales for home décor, apparel, and accessories compared to the previous quarter. Additionally, the beauty category has consistently performed well over the past few quarters.

Leveraging Inventory Efficiency

Target aims to enhance its profitability by leveraging a better inventory position. According to Michael Fiddelke, Target’s chief financial officer, efficient store operations and streamlined distribution centers can be achieved when inventory levels are reduced. Exiting the third quarter, Target reported a 14% decrease in inventories compared to the previous year. With a leaner inventory position, the company will be able to minimize product discounts, thus boosting its bottom line.

Notable Profitability Recovery

Target’s efforts have resulted in significant benefits compared to the previous year. The company has witnessed markdown savings, improved profitability recovery, and productivity gains from its inventory position. In the third quarter of 2022, Target’s gross margin rate stood at 27.4%, up from 24.7% in the same period last year.

Addressing Inventory Shrink

Although progressing positively, Target still faces challenges related to inventory shrink, which includes theft and damaged items. In the third quarter, shrink levels were higher compared to the same period last year. To combat this issue, the retailer has closed nine stores earlier this year due to increased theft levels.

Overall, Target remains committed to optimizing its operations and achieving sustained growth in the market.

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