Shares of retail giant Target (NYSE: TGT) have grossly underperformed the markets in 2022. While the S&P 500 index is slowly inching closer to bear-market territory, Target stock is down 41% from all-time highs and has slumped 48% year to date.
Target reported its quarterly results on May 18 and disappointed investors. Wall Street forecast Target to report earnings of $3.06 per share while Target’s actual earnings came in much lower at $2.19 per share. The company’s stock price fell off a cliff, losing over 25% and it hasn’t yet recovered. It closed on June 17 at $139.30.
Until the numbers came in, Target stock was down just 7.18% in 2022 compared to the S&P 500’s loss of over 14%. Let’s see if the retail behemoth should be part of your portfolio in 2022.
A look at Target’s Q1 earnings
Target’s numbers for Q1 2022 missed its own guidance and market expectations as well. Sales grew 3.3% compared to the corresponding quarter in 2021. Store sales were up 3.4% and digital sales grew 3.2%. However, over 95% of Target's first-quarter sales came from their stores. Sales growth was powered by the following categories: Food & beverage, beauty, and household essentials.
Target said that the reason why it missed expectations was because, “Operating margin rate of 5.3% was well below expectations, driven primarily by gross margin pressure reflecting actions to reduce excess inventory as well as higher freight and transportation costs.”
In an interview with CNBC, Target CEO Brian Cornell said, “The mix of the [product] categories looked very different than we expected. We saw great strength in food and beverage and household essentials. Our beauty business grew by double digits. But we started to see some softening in some of the discretionary categories… TVs, kitchen appliances, bikes. And as consumers started to shop differently… that certainly impacted our mix and our margin mix. But it’s also added complexity in our supply chain.”
In the interview Cornell said that the company’s profitability wasn’t as expected, and it didn’t expect the kind of increases it incurred in freight and transportation costs. The company estimates that the increase is going to cost them a billion dollars and that the increased complexity in its supply chain will add pressure to its operational income.
Earlier this week the company stated it will reduce prices on several products due to lower consumer spending. Target will also cancel orders from a few vendors to reflect the change in consumer behavior. As inflation is gaining pace, customers are focusing on purchasing essential items that include groceries and back-to-school supplies.
Target also expects an operating margin of just 2% compared to its earlier forecast of 5.3%. The less than encouraging forecast drove TGT stock lower by 5%.
Target is fundamentally strong
Target has been consistently beating the broader markets. In the last five years until its May 18 earnings, TGT stock grew at a CAGR (compounded annual grow rate) of 32.45%. If you include the last 20 days, the rate comes down to 23.13%, still a very impressive number.
Target is one of the largest retailers in the market and it has very few competitors. The company’s Q1 numbers marked 20 consecutive quarters of sales growth. This is a stellar achievement by any measurement. Target has had to face multiple headwinds in the quarter and the fact that its numbers still grew (albeit at a slower pace) underline its strong fundamentals.
To put it simply, Target overstocked its inventory as it completely misinterpreted consumer demand. The problem Target faced was that it overstocked in categories where consumer spending slowed down massively, and it was left with too much inventory.
Target had one bad quarter but that doesn’t take away anything from the long-term prospects of the company. If anything, the drop in price could be construed as a bargain opportunity. The average analyst target price for Target stock is $209.23 which is a potential upside of almost 30%. Target is also a Dividend King considering it has increased its dividend payout for the last 50 straight years.
Economists also predict a recession in the offing. Target is a company that has been through multiple downturns and should be able to navigate this one as well.