Department store chain Target (TGT 2.79%) topped its second-quarter earnings estimates, sending shares higher as a result. But it's a dubious victory. Same-store sales slipped 5.4% year over year, and the company cut its already-weak revenue and earnings guidance for the entirety of fiscal 2023. The company is clearly running into more of a headwind than some of its rivals.
There is one mostly overlooked bright spot buried within Target's Q2 reporting, however, which leaves the retailer better positioned for the future than most investors may recognize. That's its inventory levels. It doesn't have too much of it -- finally -- leaving the door open to procuring more of the more marketable goods if and when it needs them in the foreseeable future.
Inventory levels are back under control
If you've not yet heard, Target's Q2 top line rolled in at $24.8 billion. That's 4.9% less than it reported for the same quarter a year ago, falling short of estimates of nearly $25.2 billion as well as marking the first quarterly sales drop in six years. Per-share earnings of $1.80 are firmly higher than the Q2 2022 comparison of $0.39, as well as better than analysts' average expectation of $1.39 per share.
Just bear in mind that the year-ago bottom line was crimped by the still-ringing echoes of the COVID-19 pandemic and newly soaring inflation. It's not exactly an impressive apples-to-apples comparison.
Whatever the case, the company lowered its full-year earnings guidance from a range of $7.75 to $8.75 per share to only $7.00 to $8.00 per share, simultaneously lowering sales guidance as well. Target now anticipates same-store sales falling by a "wide range around a mid-single digit decline."
There's a compelling aspect of Target's Q2 report, though, that most investors are talking about. Its inventory situation is improving -- a lot. As a refresher, Target found itself sitting on way too much inventory headed into the latter half of last year. The post-pandemic consumerism rebound it was expecting ended up being a bit of a letdown.
Not only did this lead to heavy, margin-crimping discounting, it also meant there was neither room nor budget to fully capitalize on the usual swell of demand late in the calendar year (linked to Halloween, Christmas, and back-to-school shopping, etc.). Such problems can often linger in the retailing business, preventing companies from being able to buy new goods.
At least this sliver of Target's current challenges, however, seems to be under control. The graphic below makes part of the point. While revenue took more than its usual sequential tumble last quarter, the cost of the goods the retailer sold fell even more.
End result? Gross profit-margin rates continue to inch a little higher. Although still not back up to the 30% range usually seen before and even during the pandemic, Q2's gross profit margin rate of 28.2% is the highest number seen since late 2021 when it was on the way down thanks to the slow, grinding impact of the coronavirus contagion.
Data source: Target Corp. and Macrotrends.net. Chart by author. Revenue and cost of goods sold are in millions.
The next graphic rounds out the idea that Target finally has a much-needed handle on its previously bloated inventory levels. Although up from the holiday quarter's levels, the retailer's inventory/sales ratio as of the end of last quarter is still well down since the middle of 2022. That's thanks to concerted clearance efforts put into motion earlier this year.
Data source: Target Corp. and Macrotrends.net. Chart by author. Revenue and inventory are in millions.
Indeed, at $12.7 billion, the company has less merchandise than it did at this time of year before the pandemic took hold even though it's doing more business now than it was doing then.
Target stock isn't the risk many investors fear it is
There's still much work to be done. Target remains a major victim of organized and unorganized shoplifting, which is evolving into acts of outright violence. The company is also caught in the middle of a culture war that may be keeping some shoppers away.
Even so, the company's got options that matter. Its stores aren't jam-packed with too much of the wrong merchandise any longer; as such, it's got room to bring in more goods. It's also got the option of not bringing in more goods if the current degree of demand doesn't merit it. This flexibility means a great deal even if its not apparent to investors.
Bottom line? It's not been an easy stock to own of late. But priced more than 20% below analysts' consensus target of $156.88 per share, Target stock seems like investors consider it a lost cause. That's just not the case. The company's actually likely to heal itself much sooner than most seem to expect, particularly now that its inventory headaches are in the rearview mirror.
