Target (TGT) Misses The Mark With Downside Margin Guidance, Retailers May Have A Rough Summer

2:41 pm Tuesday, June 07th, 2022

Target (TGT) is under pressure today after the company lowered its margin guidance for Q2 (Jul), as it plans to mark down prices and cancel orders to clear out excess inventory. Just last month, Target reported an EPS miss and guided margins lower. Just a few weeks later, the retail giant is cutting margin guidance again. The news is dragging down other retailers today; it looks like Q2 will be another rough quarter for the industry.

Surging freight and transportation costs have weighed on Target’s performance, and the company also misjudged which product categories are currently most compelling to consumers. Last year, shoppers were buying TVs and appliances for their home, but they are now shifting their attention to luggage and toys. Also, TGT may have erred by pulling forward some inventory early, just as that softness was forming.

What is the new plan? Target is planning additional markdowns, removing excess inventory, and canceling orders. The plan also includes adding holding capacity near US ports to add flexibility and speed. Target expects continued strength in “frequency” categories such as Food & Beverage, Household Essentials, and Beauty, while it forecasts weakness in discretionary categories like Home, for which trends have changed quickly over the course of the year.

Operating margin was already weak in Q1 at 5.3% vs 9.8% a year ago. At the time, Target guided to a similar number in Q2; however, its guidance now calls for margins of just 2%. Target is not providing EPS guidance, but the big cut to margins makes it likely that analysts will be lowering EPS estimates in short order.

The silver lining is that Target expects a 6% operating margin in the second half of the fiscal year, which would exceed its average fall season in a pre-pandemic world. Therefore, Q2 could act as a trough, but we do not want to see Target guiding down again this fall. Target also reaffirmed its expectation for full-year revenue growth in the low- to mid-single digit range, and it expects to maintain or gain market share in 2022.

Overall, we have long viewed Target as great retailer. It made an early push into digital to thwart Amazon (AMZN), and it consistently posts better comps than Walmart (WMT). However, these last couple of quarters have been an uncharacteristic setback. The consumer is still spending, and traffic remains brisk at Target, but the company was slow to see the shift in consumer purchasing preferences.