Q2 2022 Target Earnings (TGT): Earnings drop nearly 90%

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A sign outside a Target department store on June 07, 2022 in Miami, Florida. Target said it expects earnings to suffer in the near term as it flags junk items, cancels orders and takes aggressive action to get rid of excess inventory.

Joe Raedle | Getty Images

Target Wednesday said its quarterly profit fell nearly 90% from a year ago, as the retailer followed his warning that high markdowns on unwanted goods would weigh on its results.

The big-box retailer largely missed Wall Street expectations, even after the company itself lowered its forecast twice.

Still, the company reiterated its guidance for the full year, saying it was now positioned for a rebound. He said he expects full-year revenue growth in the lower to mid-range numbers. Target also said its operating margin rate would be in a range of around 6% in the second half. That would represent a jump from its 1.2% operating margin rate in the second quarter.

Target shares fell about 2% in premarket trading.

Chief Financial Officer Michael Fiddelke defended Target’s aggressive inventory efforts. He said the retailer needed to act quickly, so it could clear clutter, prepare for the holidays and navigate an economic backdrop clouded by inflation.

“Had we not managed our excess inventory head-on, we could have avoided some short-term problems on the profit line, but it would have hampered our longer-term potential,” he said. “Although our quarterly profit has decreased significantly, our future is brighter.”

Here’s how Target fared for the three months ended July 30, compared to Refinitiv’s consensus estimates:

  • Earnings per share: 39 cents vs. 72 cents expected
  • Revenue: $26.04 billion vs. $26.04 billion expected

Target has seen a sharp turnaround in the past two quarters. After posting eye-popping sales numbers quarter after quarter during the pandemic, he’s seen clothes, coffee makers, lamps and more linger on the shelf — then get kicked off the clearance rack. Some of these surplus goods are the same ones that sold out during the early parts of the pandemic, when shoppers bought home decorations and loungewear.

The turnaround forced the big-box retailer to cut its profit outlook twice, once in may and then again in Juneand to commit to acting quickly to bring its inventory level back to a healthier level.

Inventories, however, remained high: $15.32 billion at the end of the second quarter, compared to $15.08 billion at the end of the first.

But CEO Brian Cornell said it’s a more favorable mix, as Target leans into high-frequency categories like food and household essentials as well as popular categories like seasonal merchandise. It canceled more than $1.5 billion in orders for discretionary categories with weaker demand.

Fiddelke said the inventory count is higher due to cost inflation and receiving inventory earlier to ensure Target is ready for the holidays.

In the second quarter, the company’s net income fell to $183 million, or 39 cents per share, from $1.82 billion, or $3.65 per share, a year earlier.

Total revenue reached $26.04 billion from $25.16 billion a year ago, partly due to higher prices due to inflation.

Quarterly earnings were squeezed in different ways. Sales of many goods became less profitable as they stood out. Freight, freight and shipping costs have risen as fuel prices have risen. And the company had to increase its workforce and cover more distribution center compensation because it had to deal with an overabundance of extra stuff.

A cautious approach

Big box rival Walmart said on Tuesday it had seen a marked shift in consumer behavior, as even the wealthiest households sought deals on groceries and daily necessities. The company told CNBC that about three-quarters of its market share gains in food came from households with annual incomes of $100,000 or more.

Target, on the other hand, said it doesn’t see as much inflation-fueled change. Unit sales increased in each of its five major merchandise categories, with particular strength in two categories: food and beverages, and beauty and household goods.

Even though profits fell, comparable sales and traffic increased.

Comparable sales, a key metric that tracks sales online and in stores open at least 13 months, rose 2.6% in the second quarter, on top of growth of 8.9% last year. That was just below estimates, which called for a 2.8% increase, according to StreetAccount. At Target stores and on its website, traffic was up 2.7% year over year.

Fiddelke, the chief financial officer, said traffic growth is proof that buyers still have buying power and will help Target achieve its best earnings outlook for the second half of the year.

“The resilience of this strong guest response positions us well, although I can’t predict every curveball that could land on us in the fall,” he said on a call with reporters.

Fiddelke said consumers vary by geography and income level, and they seek value in different ways. For example, some buy larger packs to save more per unit or try one of Target’s low-cost private brands instead of a national brand.

Cornell said Target is watching consumer spending closely. He said he was stocking up on popular items and ordering fewer products that shoppers might overlook.

“We’re going to take a very balanced approach,” he said, making sure to “plan cautiously” in discretionary categories where the company has seen changes in behavior.

As of Tuesday’s close, Target shares were down about 22% so far this year. Shares closed Tuesday at $180.19, up nearly 5% that day after Walmart beat profit expectations.

This story is developing. Please check for updates.

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