Target (NYSE: TGT) shares are up modestly following the company's Q2 earnings report despite a nearly 90% drop in profits due to taking losses on excess inventory. On the bullish side, the retailer did affirm its guidance for the full year which is adding to optimism that the worst may be over for the group as it dealt with excess inventory and a shift in consumer spending.
This shift towards lower-margin items like groceries and gasoline is positive for the top line but devastating for the bottom line. And like so many of the debates of the past year, it comes down to whether this change in behavior is another consequence of the pandemic or due to the economy weakening. Based on Target's and other retailers' results, the former is more likely.
Inside the Numbers
In Q2, Target reported $0.39 in earnings per share, exceeding estimates of $0.72 per share. This is a big decline from last year's EPS of $3.65. Revenue was in line with expectations at $26.04 billion vs $26.04 billion expected. This was a slight improvement from last year's $25.1 billion.
Going into the earnings report, Target had twice lowered its estimates due to it being forced to discount merchandise in order to solve its inventory problems. As a result, net income for the quarter was 90% lower than last year.
However, the company did reiterate its full-year forecast and says it sees a rebound. It sees full-year revenue growth in the low to mid-single digits with operating margins in the 6% range for the second half of the year. This is a major improvement from 1.2% operating margins in Q2.
The company defended its decision of prioritizing solving the inventory issue so that it could be fully prepared for the holidays and get back to its typical strategy of leaner inventories.
Inventories remain slightly elevated at $15.3 billion at the end of Q2 vs $15.1 billion at the end of Q1. However, it sees this inventory mix as being much more compatible with consumers' tastes and preferences than a few months ago.
The company should get relief on some fronts especially due to lower freight, transportation, and shipping costs which have plummeted over the past couple of months. Additionally, lower food prices should also translate into higher margins for the retailer.
Some other silver linings are that sales by units in all 5 of its major categories grew with the most strength in food & beverages and beauty & household essentials. Comparable sales, which measure digital sales at stores open at least 13 months, grew by 2.6%. Traffic to stores and the website were up 2.7%.