Target stock was plummeting on Wednesday after its Q3 earnings report. Is this a buying opportunity?
Target (NYSE:TGT) stock was plummeting on Wednesday after the big box retailer posted disappointing third quarter results, missing both revenue and earnings estimates.
Target generated $25.3 billion in sales in the third quarter, up about 1% year-over-year, while total revenue ticked up 1.1% to $25.7 billion. This was below analysts’ estimates of $25.9 billion.
Net earnings were even more disappointing, plunging to $854 million, a 12% drop compared to the same quarter a year ago. Target generated earnings of $1.85 per share in the quarter, which was well off expectations of $2.30 per share. This was Target’s widest earnings miss in two years.
It also fell short of Target’s own target of $2.10 EPS in Q3.
The outlook for Q4 is not any better, which caused a selloff on Wednesday, as Target stock was down about 21% in early trading to about $122 per share.
10,000 items to see lower prices
When you compare the results to Walmart, which had a strong third quarter, beating estimates and raising its outlook, and rising retail sales industrywide , Target’s results are a bit of a head scratcher.
So, why did Target underperform so significantly?
Target has always been pricier than Walmart and the consistent high inflation has apparently led customers away from Target. Walmart, which caters to cost-conscious consumers, has lately made inroads in attracting higher-income shoppers, which may be eating into Target’s customer base.
That’s why Target announced in October that it will cut prices on 2,000 items this holiday shopping season, including food and beverages, everyday essentials, holiday gifts and items. This follows an initiative to reduce prices on 5,000 launched in May. By the end of the holiday season, Target expects to have slashed prices on a total of 10,000 items sold in its stores.
“From meal prep and gifting to everyday needs, Target’s offering the kind of exceptional value that’ll make it even easier for everyone to save money as they embrace the magic of the season,” Rick Gomez, Target’s chief commercial officer, said back in October.
In the third quarter, traffic increased 2.4% year-over-year, but that was mainly due to a boost in online shopping. Comparable store sales rose 0.3% in Q3, at the low end of its guidance, but the increase was due to a spike in online shoppers. Specifically, digital comparable sales grew 10.8%, which included a 20% spike in same-day delivery.
Earnings hurt by higher costs
Earnings took a hit due to sluggish sales and higher operating costs. The gross margin rate was 27.2% in Q3, compared with 27.4% in Q3 of 2023. This was due to higher digital fulfillment and supply chain costs from managing higher inventory levels. Also, the selling, general and administrative (SG&A) expense rate was 21.4%, up 5 basis points year-over-year, due to higher costs, including higher team member pay and benefits and higher general liability expenses.
“I’m proud of our team’s efforts to navigate through a volatile operating environment during the third quarter. We saw several strengths across the business, including a 2.4% increase in traffic, nearly 11% growth in the digital channel, and continued growth in beauty and frequency categories,” Target Chair and CEO Brian Cornell said. “At the same time, we encountered some unique challenges and cost pressures that impacted our bottom-line performance.”
That may be why Target is being cautious in its outlook for Q4, as it is calling for flat comparable sales in Q4 and EPS of $1.85 to $2.45. That’s a pretty wide range, reflecting its uncertainty. For the full year Target expects an EPS range of $8.30 to $8.90, down considerably from previous guidance of $9.00 to $9.70 EPS.
Is Target stock a buy on the dip?
Target stock was in freefall after the earnings report, down about 21% as of mid-morning on Wednesday to $122 per share.
Whenever a company like Target, a market leader and Dividend King, sees a drop like this, it is always good to consider a buy on the dip.
In this case, Target should be worth a look. Its P/E ratio is fairly low, at 16, and its price-to-sales ratio is just 0.67 – very low. While there could be another difficult quarter ahead, I would also not be shocked to see Target start moving higher from its price cuts and inventory reduction efforts, as well as its continued strong growth in digital sales. The wide range in the EPS shows how cautious management is being.
Analysts generally tend to agree as Target has a median price target of $178.50, which would be a 46% increase over the current price. However, that price target will likely go down as Target saw a few reductions from the street after Q3 earnings.
Target stock should be on your radar as a 21% drop is a good time to take a closer look. It remains a fantastic dividend stock, with 56 years of increases and a robust 2.87% yield. It’s also a market leader and a solid long-term performer, with a plan to right the ship. But given the outlook for Q4, investors may want to wait another quarter to see if it goes lower.
