What happened
Shares of Target (TGT -0.51%) were moving higher today after the big-box retailer reported mixed results in its earnings report, but it was enough to give the stock a boost as low expectations were already baked in.
As of 10:05 a.m. ET, Target stock was up 5.2%.
So what
In an environment where consumer spending has shifted from goods to services, and sales of discretionary goods have fallen, Target managed to top profit estimates but sales were weak.
Comparable sales fell 5.4% in the quarter due to poor performance in discretionary categories. Overall revenue was down 4.9% to $24.8 billion, which missed the consensus at $25.2 billion. Same-day fulfillment services, a longtime source of strength for the company, was up 4% with a 7% increase in Drive-Up.
Target lapped a period when unusually high inventory levels crushed profit margins and the company reduced inventory by 17% and 25% in discretionary categories, which help drive gross margin up from 21.5% to 27%.
Operating margin improved by 3.6 percentage points to 4.8% and adjusted earnings per share jumped from $0.39 to $1.80, topping estimates at $1.39.
CEO Brian Cornell said, "Our second-quarter financial results clearly demonstrate the agility of our team and the resilience of our business model, as we saw better-than-expected profitability in the face of softer-than-expected sales."
Now what
Target's guidance reflects continuing headwinds in consumer demand and the company forecast a mid-single-digit comparable sales decline for the second half of the year, and it cut its adjusted earnings per share forecast from $7.75-$8.75 to $7.00-$8.00. For the third quarter, it called for a similar decline in comparable sales and adjusted earnings per share of $1.20-$1.60, which was below the consensus at $1.84.
Despite the weak guidance, Target shares are down more than 50% from their peak, and that discounted price seems to be enough of a reason to buy the stock on today's report. Based on its updated guidance for the year, Target still trades at a discount to the S&P 500. Considering the company's strengths, that looks like a good price as it should return to growth once consumer demand normalizes.
