Target Earnings Preview: Resilience Amid Market Rout Shows Post-Pandemic Strength
2022.05.17 09:46
- Reports Q1 2022 earnings Wednesday, May 18, before the open
- Revenue Expectation: $24.41B
- EPS Expectation: $3.06
When Target (NYSE:TGT) reports its latest quarterly earnings, the odds are that investors will see the discount retailer maintaining its growth trajectory untouched despite a tough Q1 2022 for the broader US economy.
Target’s share performance reflects this strength. After surging more than 80% during the past two years, the Minneapolis-based retailer proved a safer bet than many mega-cap technology names in the current market rout. TGT closed Monday at $219.25.
TGT Weekly Chart
According to the company’s latest guidance, stronger in-store traffic and growing demand for merchandise categories, including food, apparel, and home goods, will propel a single-digit increase this year, despite cost pressures and supply-chain hurdles.
Target sees revenue growth in the mid-single digits starting next year and beyond, while return on invested capital will be in the high 20% to 30% range.
This outlook signals that the company is in an excellent position to build on the extraordinary sales boom of the last two years while protecting profit margins from the current four-decade-high inflation.
That said, Target still faces macroeconomic headwinds, including labor shortages, supply-chain disruptions, and cost escalations, suppressing the company’s gross margins this year.
During its last earnings report in March, the company told investors it would add $300 million in wage and benefit expenses amid a tight US labor market.
Surging Online Sales
Despite pressure on margins, most analysts remain bullish on Target’s prospects due to its superior online capabilities and its market share gains during the pandemic.
In an Investing.com poll of 31 analysts, 23 rate TGT stock as “Outperform,” with a 12-month consensus price target, implying a 21.6% upside.
TGT Consensus Estimates
Target’s strong performance during the past two years results from Chief Executive Officer Brian Cornell’s efforts to turn around Target’s retail outlets. He spearheaded the remodeling of hundreds of stores, introduced many affordable fashion brands, and bolstered the retailer’s e-commerce offerings.
Furthermore, Target focuses on investing in its stores while also growing digital sales. Amid supply chain disruptions, the company has been using its stores more as mini distribution centers for its booming digital business during the pandemic to fulfill online orders better. Around 19% of Target’s total sales are now digital, up from 8.8% in 2019.
The company is building large sortation centers and warehouses that use automation to quickly pack same-day delivery orders near city centers such as Chicago to expand the business faster, the Wall Street Journal reported citing executives.
In a note yesterday, Deutsche Bank named Target a top pick, advising clients to buy the stock after the recent weakness that it believes is “overdone.” RBC also reiterated Target as its top idea over the next 12 months.
Bottom Line
During Wednesday’s report, Target may show some margin suppression due to higher costs, hurting many retailers this year. Nevertheless, in our view, this short-term challenge shouldn’t discourage long-term investors from holding this quality retail stock in their portfolios.
