Bearish Traders Smell a Cynical Opportunity with Big-Box Retailer Target

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Budget tightening and organized crime theft impose hefty challenges for fundamentals underlying TGT stock

If the market represents the arbiter of all things, it’s speaking loudly about big-box retailer Target (NYSE:TGT). Unfortunately for longtime shareholders, though, the sentiment at the moment tilts heavily toward the bearish side of the equation.

Following the conclusion of yesterday’s midweek session, TGT stock found itself down nearly 3% below parity. In the trailing five sessions, shares slipped more than 9%, an alarming reversal of fortune.

Up until May 17, when Target disclosed its results for the first quarter of 2023, TGT stock kept its head above water for the year. However, once management revealed the core details of its first-quarter report, sentiment immediately soured. Since the January opener, Target stakeholders now stare at a 5.69% loss, with more pain possibly on the way.

Shrink’s Red Ink

On the bottom line, the big-box retailer disclosed Q1 GAAP earnings per share of $2.05, down 4.8% from the $2.16 EPS posted in the year-ago quarter. Adjusted EPS came out to $2.05, a decrease of 6.2% compared to the $2.19 delivered one year ago.

Operationally, Target stated that comparable sales clocked in as flat to last year in Q1, reflective of comparable store sales growth of 0.7% and comparable digit sales decline of 3.4%. Total revenue hit $25.3 billion, expanding 0.6% year-over-year, reflecting total sales growth of 0.5% and a 10.2% increase in other revenue.

Most worryingly, though, Target chair and CEO Brian Cornell stated in part the following. “As we look ahead, we now expect shrink will reduce this year’s profitability by more than $500 million compared with last year. While there are many potential sources of inventory shrink, theft and organized retail crime are increasingly important drivers of the issue.”

Bearish Options Spike

Unsurprisingly given the dour ambiance, Fintel’s screener for options flow showed a significant spike in bearish activity during the May 24 session, specifically for the purchase of TGT put options. Overall, the volume for the acquired puts amounted to 24,826 contracts. On the other hand, the volume for sold puts – which feature a bullish implication – landed at 18,366 contracts.

On average, the put/call ratio for TGT stock stands at 1.02. Since puts generally represent bearish bets, ratios greater than one indicate pessimism. At the moment, the 60-month beta for TGT is 1.12, reflecting modestly greater volatility than the stock market at large.

Nevertheless, prospective contrarians in TGT stock should be careful about reading too much into some of Target’s mildly bearish metrics.

In particular, Target insiders have not demonstrated much belief in their business. According to Fintel’s screener for insider transactions, the last insider purchase occurred on March 9, 2017. On the flipside, the most recent insider sell occurred on May 18 of this year (filed on May 22).

According to The Wall Street Journal, consumers have become increasingly cautious about their spending in recent months as higher interest rates and stubbornly elevated inflation take their toll. This dynamic resulted in reduced spending on nonessentials.

At its peak in 2021, TGT stock traded hands at over $260. On May 24, shares closed at a dime above $143.

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