Target Jumps as Big Profit Gain Overshadows Cut to Forecast

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(Bloomberg) — Target Corp. shares clawed back some of their recent losses after a surprising profit surge in the second quarter overshadowed the company’s increasingly cautious outlook on the rest of the year.

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Adjusted earnings more than quadrupled during the quarter ended in late July, Target said in a statement Wednesday, reflecting the retailer’s progress in paring the bloated inventories that forced deep markdowns a year ago. The profit gain crushed Wall Street’s estimates and took the sting out of a sales decline, Target’s first in four years, and a cut to its annual profit forecast.

The upbeat second-quarter performance underscored Target’s ability to navigate a slump in discretionary-goods purchases as consumers channel more spending to services and essentials. For a company that has been getting hammered in the stock market since early 2022, that counted as good news even as Target cautioned that it still faced significant headwinds.

The results fit a common recent pattern in retail, showing continued consumer resilience in reported quarters even as companies express caution about the future. Home Depot Inc. on Tuesday reported a second-quarter comparable-sales decline that was better than analysts had feared, but the hardware giant maintained the full-year outlook it had lowered in May.

“The positives for Target are the margin outperformance and inventory reduction, coupled with the fact that this is one of the most hated companies in all of retail (which means the bar is very low),” Vital Knowledge analyst Adam Crisafulli wrote in a note to clients.

The shares jumped as much as 8.2% in New York trading Wednesday, the most intraday since March 2022. Target sank 16% this year through Tuesday. For comparison, an S&P index of US consumer-staples companies fell less than 1% over the same period, while the S&P 500 Index rose 16%. Shares of Walmart Inc. — a key competitor that will report quarterly results on Thursday — gained 12%.

Fewer than half of analysts tracked by Bloomberg recommend buying Target shares, compared with 81% of analysts who recommend buying Walmart’s stock.

Target’s report was “clearly better than the extremely negative sentiment toward the story lately,” Rupesh Parikh, an analyst at Oppenheimer & Co., said in a note to clients. “We expect a relief rally today followed by a likely volatile trade for the balance of the year.”

Pride Controversy

Revenue during the latest quarter took an extra hit from a controversy that began in late May around Target’s Pride Month collection of LGBTQ-themed goods, which sparked protests from conservative activists and threatening behavior by some customers.

While comparable sales slipped 3% in May, the metric tumbled 7% in June, Target said on a conference call to discuss the results. The drop eased to 5% in July, and Chief Executive Officer Brian Cornell said he was “very pleased” with sales trends in early August.

The recent recovery is consistent with the resilience in US retail sales, which rose in July by more than economists had projected.

New headwinds such as the resumption of student-loan repayments are likely to materialize in the coming months, Chief Financial Officer Michael Fiddelke said in a briefing with reporters. But the company is showcasing its food and beauty offerings, which are still selling briskly.

“It’s prudent to be cautious right now,” he said. “Student-loan payments will cause additional pressure on already strained consumer budgets.”

Adjusted earnings for the current fiscal year will be between $7 and $8 a share, Target said. The midpoint of $7.50 is 75 cents less than the average of the previous forecast range and is below the average analyst estimate of $7.81.

In the fiscal second quarter, adjusted earnings jumped $1.80 a share, compared with the $1.40 average of analyst estimates compiled by Bloomberg. Target’s gross margin, a broad measure of profitability, rose to 27%, while analyst had estimated 25.6%. Easing freight costs and stepped-up expense management provided a boost, the Minneapolis-based retailer said.

Comparable sales dropped 5.4% during the quarter, worse than the 3.8% fall projected by analysts. The rise in demand for beauty products and food and beverages wasn’t enough to offset the weakness in many discretionary categories.

(Updates with details from conference call in 10th paragraph.)

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