TGT

Target Corporation

151.79
USD
-2.62%
151.79
USD
-2.62%
137.16 268.98
52 weeks
52 weeks

Mkt Cap 74.08B

Shares Out 488.04M

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You Can't Safely Step Into Target Stock Until This Happens

Three months ago, Target (NYSE: TGT) warned shareholders that the second quarter could be a tough one. During the company's first-quarterearnings call chief financial officer Michael Fiddelke said, "We expect a [second-quarter] operating margin rate in a wide range, centered around our first-quarter rate of 5.3%, well below where we would expect to operate under normal conditions." The key culprit? Excess inventory that needed to be heavily marked down to get out of its stores. And sure enough, the company largely delivered as expected. Gross margins on the goods its sold slipped from the first quarter's 24.3% to 20.4% in the second quarter, well down from the year-ago figure of 30%. Subsequently, the operating bottom line tumbled from $3.65 per share a year earlier to a scant $0.39 per share, well short of analysts' estimates of $0.79 despite same-store sales growth of 2.6%. Sometimes a company has to bite the bullet and move on. What's largely been obscured by all the noise surrounding Target's earnings miss, however, is that it ended the three-month Q2 stretch with almost the same degree of inventory trouble that it had at the end of Q1. Given the looming shift to autumn goods and holiday shopping shortly thereafter, the company's profit troubles could linger longer than most investors might suspect. Until the retailer clearly pushes past its inventory bloat, it might not be a worthy investment at all. Inventory levels remain unusually high It's more complicated than it seems. Procuring merchandise to sell is done months in advance. The specific merchandise and the amount that can be bought are often contingent on the amount of inventory already in stores and its plausible market value. Retailers might not be able to make a commitment to new goods until older goods are sold, or at least forecast to be sold. It generally involves a great deal of guesswork. This dynamic remains a particular problem for Target, which finds itself overloaded with inventory heading into fall and winter. The chart below illustrates the problem. Target ended July with $15.3 billion worth of inventory on the books, which is a record. Though inventory as a percentage of sales pulled back from the first quarter's 60% to 59% as of the end of the second quarter, that's still unusually high at the midpoint of the year. Prior to the pandemic, Target's second-quarter inventory levels were generally closer to 50% of second-quarter revenue. It's a worry for two simple and connected reasons: Target is still holding too much decreasingly marketable merchandise, which in turn is limiting the procurement of goods that will be marketable during the next few months. Not only is the market for apparel on the verge of sweeping change (out with swimwear, in with sweatshirts), but we're also on the verge of the all-important holiday shopping season. Much of that merchandise has already been ordered, but those orders have already been capped by the relatively thin "open to buy" levels resulting from the first quarter's (and now the second quarter's) heavy in-store inventory levels. And if the retailer can't shed enough of what it's sitting on now, what little buying flexibility it can use to get fresh goods into its stores before the end of the year will disappear within the next few weeks. The ultimate risk is indefinitely crimped profit margins. This could take a while The situation isn't insurmountable for Target, but it's not instantaneously solvable, either. It could take several quarters to steer inventory levels back down to near 50% of sales, on average. Once Target's buyers' options become limited because goods are moving too slowly, it makes it tougher to get enough of the right merchandise to generate much-needed cash flow to expand open-to-buy budgets. Doing so could require making pricing decisions on one product (also called a stock-keeping unit [SKU]) at a time, and then keeping close tabs on sell-through rates for that SKU at those prices. That's a tall, complicated order, but it's what must be done. Until then -- until each quarter's inventory/sales ratios start to look more like their pre-pandemic levels -- Target stock is tough to own. You might be better served by stepping into other prospects in the meantime. 10 stocks we like better than Target When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.* They just revealed what they believe are the ten best stocks for investors to buy right now... and Target wasn't one of them! That's right -- they think these 10 stocks are even better buys. *Stock Advisor returns as of July 27, 2022 James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc. Today’s Big Picture Asia-Pacific equity indexes ended today’s session mixed. Hong Kong’s Hang Seng fell 0.67%, China’s Shanghai Composite ended the day essentially flat, down a mere 0.02% while Australia’s ASX All Ordinaries gained 0.50%, Taiwan’s TAIEX advanced 0.84%, and Japan’s Nikkei rose 1.14%. India’s markets are closed to mark the country’s Independence Day holiday and South Korean markets are closed today to mark that country’s Liberation Day. Interestingly, Liberation Day is celebrated in both South and North Korea. By mid-day trading, major European equity indices are up moderately, and U.S. futures point to a down open later this morning. Following the robust movement in equities over the last few weeks, as we start the new week off, they look to give back at least some of those gains. The surprise rate cut by the People’s Bank of China this morning raises fresh questions over the speed of the global economy, especially after July economic data for China missed expectations. Even though we have a sizable downshift in the number of companies reporting their quarterly earnings this week, we see a meaningful pivot toward retail companies, the majority of which were plagued with bloated inventories when they reported their prior quarter. Expectations are for margin and bottom line pain as they look to clear out those inventories in time to prepare for the important holiday shopping season. As these reports roll in, we’ll know how bad the pain is and whether consumers are biting. Data Download International Economy The People's Bank of China surprised by cutting its one-year lending facility rate by 10 basis points to 2.75% and cut the seven-day lending rate, the same amount to 2%. The move preceded weaker than expected July data for the country. China's July Industrial Production rose 3.8% YoY, below the expected 4.6%, and slightly lower than June’s 3.9% figure. Retail sales increased 2.7% YoY in July below the 5% forecast. Manufacturing hubs and popular tourist spots imposed lockdown measures in July after fresh outbreaks of the more transmissible Omicron variant were found. On Friday, China reported more than 2,000 local Covid-19 cases as infections in the southern Hainan island edged higher with mass testing and several lockdowns resulting. Japan’s preliminary GDP for 2Q 2022 came in at 2.2% YoY, better than the 0.1% reading for the prior quarter but below the expected 2.5% figure. On a QoQ basis, the preliminary reading was 0.5%, up from 0.0% in 1Q 2022 but again below the expected figure of 0.6%. Wholesale prices in Germany increased by 19.5% YoY in July of 2022 following the 21.2% gain the prior month. Compared with the previous month, wholesale prices fell 0.4% in July, the first decline since October 2020. Domestic Economy At 8:30 AM ET, we’ll get the NY Empire Manufacturing Index data for August and the headline reading is projected to fall to 5.5 from July’s 11.1 reading. AT 10 AM ET, the NAHB Housing Market Index for August will be published, and the consensus view has it unchanged MoM at 55. The U.S. House of Representatives voted 220 to 207 along party lines on Friday to pass the Inflation Reduction Act, paving the way for wide-ranging reforms in healthcare and clean energy. President Biden is expected to sign the bill into law. Data from AAA put the national average gas price at $3.959 over the weekend, but Goldman Sachs (GS) sees the price surging back to $5 by the end of the year with Brent crude returning to $130 a barrel as the market still needs to balance rising demand and tight supplies. Following last week’s inflation data, markets see a 50% chance the Fed will hike by 75 basis points in September and that rates will rise to around 3.50-3.75% by the end of the year. Meanwhile, the bond market continues to question if the Fed can deliver a soft landing, with the yield curve remaining deeply inverted. Markets Markets closed the week on a strong note with Friday seeing almost all sectors up over 1.00% and Consumer Discretionary names well over 2.00%. The Dow rose 1.37%, the S&P 500 advanced 1.73% and both the Nasdaq Composite and the Russell 2000 posted a 2.09% gain on the day. In reviewing top contributors to returns across the sectors, Apple (AAPL) and Microsoft (MSFT) combined to account for about 48% of Technology sector returns, while Tesla (TSLA) managed to do that all on its own for the Consumer Discretionary sector. Here’s how the major market indicators stack up year-to-date: Dow Jones Industrial Average: -7.09% S&P 500: -10.20% Nasdaq Composite: -16.60% Russell 2000: -10.19% Bitcoin (BTC-USD): -48.93% Ether (ETH-USD): -48.19% Stocks to Watch Before trading kicks off for U.S.-listed equities, Clear Secure (YOU), Li Auto (LI), Tufin Software (TUFN), and Weber (WEBR) will be among the companies issuing their latest quarterly results and guidance. Bloomberg reports Wells Fargo (WFC) is looking to shrink its once dominant mortgage business. Shares of PlayAGS (AGS) jumped in after-hours trading on Friday after confirming Inspired Entertainment (INSE) made a $10 per share offer for the slot machine maker. IPOs GigaCloud Technology (GCT) and Innovative Eyewear (LUCY) could price their respective IPOs this week. Readers looking to dig more into the upcoming IPO calendar should visit Nasdaq’s Latest & Upcoming IPOs page. After Today’s Market Close Fabrinet (FN), Global-E Online (GLBE), Navitas Semiconductor (NVTS), World Wrestling (WWE), and ZipRecruiter (ZIP) are expected to report their quarterly results after equities stop trading today. Those looking for more on which companies are reporting when, head on over to Nasdaq’s Earnings Calendar. On the Horizon Tuesday, August 16 UK: Employment Change, Average Hourly Earnings – June Germany: ZEW Current Conditions & Economic Sentiment – August Eurozone: ZEW Economic Sentiment – August US: Housing Starts & Building Permits – July US: Industrial Production & Capacity Utilization – July Wednesday, August 17 Japan: Core Machinery Orders – June Japan: Imports/Exports – July UK: CPI, PPI – July Eurozone: 2Q 2022 GDP US: Weekly MBA Mortgage Applications US: Retail Sales – July US: Business Inventories – June US: Weekly EIA Crude Oil Inventories US: Federal Reserve FOMC Meeting Minutes - July Thursday, August 18 Eurozone: CPI - July US: Weekly Initial & Continuing Jobless Claims US: Philadelphia Fed Index – August US: Existing Home Sales – July US: Weekly EIA Natural Gas Inventories Friday, August 19 Japan: CPI – July UK: Retail Sales – July Germany: PPI - July Thought for the Day “People who avoid failure also avoid success.” ~ Derrick Lewis Disclosures Tufin Software (TUFN) is a constituent of the Foxberry Tematica Research Cybersecurity & Data Privacy Index Tesla (TSLA), Li Auto (LI) are constituents of the Tematica BITA Cleaner Living Index Tesla (TSLA), Li Auto (LI) are constituents of the Tematica BITA Cleaner Living Sustainability Screened Index Apple (AAPL), Microsoft (MSFT) are constituents of the Tematica Research Thematic Dividend All-Stars Index The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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