Analysts caution on Target's ability to meet 2025 margin goals, citing higher fulfillment costs and declining store comps.
Target Corporation TGT shares are trading lower on Wednesday after it reported weak third-quarter results and slashed FY24 outlook.
The company reported third-quarter adjusted earnings per share of $1.85, missing the street view of $2.30.
For FY24, the company now forecasts adjusted EPS between $8.30 and $8.90, down from the previous guidance of $9.00 to $9.70. The revised FY24 EPS outlook is also below the consensus estimate of $9.55.
Here are the analyst's take on the earnings performance:
JP Morgan analyst Christopher Horvers reiterated the Neutral rating on Target Corporation.
The analyst notes that margins were a key factor in the stock's reaction, as they are crucial to assessing the likelihood of meeting the 2025 operating margin estimate of 6.0%. While shrink (loss of inventory) helped, the analyst cautioned that higher fulfillment costs and excess inventory hurt margins, lowering the outlook.
For the fourth quarter, the analyst sees flat comparable sales, with a 40-basis-point headwind from the calendar shift, resulting in an operating margin of 4%-5% and earnings per share of $1.85-$2.45, below the Street's expectation.
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BofA Securities analyst Robert F. Ohmes reiterated the Buy rating on the company, with a price forecast of $195.
The analyst notes that Target's fiscal third-quarter earnings release raises several questions. They highlight the CEO's comments about the "unique challenges" faced by the retailer, expressing uncertainty about the specific cost pressures encountered in the third quarter and how much of this can normalize in 2025.
Ohmes is also cautious about the impact of digital growth on gross margin in the fourth quarter and 2025, following the pressures seen in the third quarter.
Additionally, the increase in general liability expenses raises questions, and the analyst is curious about whether shrink (inventory loss) provided a tailwind during the quarter and if it aligned with initial expectations. Finally, Ohmes is concerned about the shift in store-originated comps to a negative -1.9% in the third quarter, reversing the +0.7% growth seen in the second quarter.
Price Action: TGT shares are trading lower by 21.2% to $122.88 at last check Wednesday.
Image via Unsplash
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