Target slashes profit outlook on student loan repayment fears and economic malaise

The economy is proving to be a moving bullseye for Target (TGT).

In its second quarter earnings report, the discounter slashed its full-year profit outlook on Tuesday, warning that general economic malaise, rising interest rates, and uncertainty from the restart of student loan repayments in a few weeks may continue to take their collective toll.

“The resumption of student loan repayments is one of many factors that we’re watching really closely,” Target CFO Michael Fiddelke told Yahoo Finance on a media call.

Target CEO Brian Cornell added that the back-to-school season has started on a “solid” note but warned that much of the key shopping period lay ahead of the retailer.

Shares rose 7.5% in pre-market trading as Wall Street speculated the guidance cut wasn’t as bad as feared.

Read more: How to prepare for when student loan repayments resume

Yet another cautious outlook from Target arrives as the big-box retailer continues to battle a more price-competitive Walmart (WMT) and the fallout from consumer uproar over Pride Month merchandise.

“Certainly, during the month of June we did see some behavior from guests that caused our teams to feel unsafe at work,” Cornell said on the Pride Month fallout. “And we certainly saw some angry guests that were intimidating our team members and damaging merchandise and defacing some of the signage. Once we took those actions and addressed the situation, we certainly saw things normalize and we certainly think we took the right steps during that moment in time.”

The earnings rundown

• Net sales: -4.9% year over year to $24.8 billion vs. estimates for $24.96 billion

• Gross profit margin: 27% vs. 21.5% a year ago and estimates for 25.63%

• Inventory growth: -17% year over year vs. estimates for -35.75%

• Diluted EPS: +357.6% year over year to $1.80 vs. estimates for $1.40

What else caught our attention

• Comparable sales dropped 5.4% from a year ago (last year they rose 2.6%):

• Inventory fell 17% from the prior year, led by a 25% reduction in the stock of discretionary categories like apparel and home goods.

• The company didn’t repurchase any of its stock in the quarter despite having $9.7 billion left on a prior buyback authorization.

• Both the number of transactions and average check size declined in the quarter.

• Third quarter earnings per share are seen in a range of $1.20 to $1.60 vs. estimates for $1.84.

• Full-year earnings per share are seen in a range of $7.00 to $8.00 (previous: $7.75 to $8.75).

Story continues

Pre-earnings vibe on Target

• “Target is facing a self-imposed Mojo hiccup, with our web traffic tracker turning meaningfully negative after the May incident. Investors are expecting a F2Q miss and guide-down for the second half. What is not yet known is how conservative the outlook will be, and if the Street will take a reasonable look for any potential EPS recovery in 2024. With sentiment widely negative and a miss/lower expected we believe it is too late to short Target stock. That said, with a material guide down likely we also believe it is too soon to jump into the name.” -Greg Melich, Evercore ISI

• “Today, we believe Target sits at the center of a number of consumer headwinds. With 51% of its sales derived from discretionary categories (apparel, hardlines, and home), 49% derived from more consumable categories (which are facing disinflation), accelerating share of wallet reversion occurring, and student loans potentially coming due, we see the risk of downward earnings revisions rising. The company was already losing market share and we fear that these headwinds might not abate as we look to the back-to-school and holiday seasons in second half.” -Chris Horvers, JPMorgan

Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email [email protected].

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