Struggling Stock Prices of Target Amidst Pessimistic Holiday Prospects Propose a Buying Opportunity for Investors.
Target (TGT 0.69%) has been labeled as Scrooge-like heading into the festive season, as its shares plummeted following unsatisfactory third-quarter outcomes and unenthusiastic forecasts for the upcoming quarter. Contrasting this scenario, Walmart (WMT 0.43%) reported impressive quarterly sales and adopted an optimistic stance ahead of the critical shopping period for retailers.
The fall in Target's share price has led to a decrease of approximately 14% in its value since the start of the year. Let's delve deeper into its most recent report and predictions to determine if this price drop could be a beneficial present for investors interested in the stock.
Unimpressive Q3 results and forecasts
After showcasing strong results in the previous quarter, signaling a turnaround, Target faltered when it unveiled its third-quarter figures. Although revenue marginally increased by 0.3% to reach $25.7 billion, it fell short of the anticipated $25.9 billion by the analysts. Adjusted earnings per share (EPS) plummeted 12% to $1.85, drastically missing analyst expectations of $2.30.
Same-store sales (comps) increased by 0.3%, thanks to a 2.4% surge in customer traffic. However, there was a 2% decrease in the average transaction value. E-commerce sales soared by 10.8%, but on-site comparable sales experienced a 1.9% decline. Beauty remained a star segment for Target, with a 6% rise in comps. Nevertheless, the company pointed out that budget constraints of consumers due to prolonged inflation are causing customers to wait for offers before making purchases.
The retailer reported impressive growth in loyalty members, signing up an additional 3 million during the quarter. Management indicated that this expansion has benefited its advertising business, which saw growth in the mid-teens during the quarter. Conversely, after enhancing gross margins in the previous quarter, Target reported a 20 basis point year-over-year decline to 27.2%, and a 170 basis point decrease sequentially from 28.9% in the second quarter. The rise in digital fulfillment and supply chain expenses was attributed to the decline in gross margins.
Adjusted EPS
Looking forward, Target reduced its full-year earnings prediction, setting the range between $8.30 and $8.90 per share – a notable downgrade from its previous forecast of $9 to $9.70.
$8.60 to $9.60
| Metric | Original Guidance | Prior Guidance | New Guidance || --- | --- | --- | --- || Adjusted EPS | $8.60 to $9.60 | $9 to $9.70 | $8.30 to $8.90 |
$9 to $9.70
For the fourth quarter, it projected comps to remain flat with adjusted EPS estimated to be between $1.85 and $2.45. It stated that spending on discretionary items would continue to be soft, while also acknowledging the presence of five fewer shopping days between Thanksgiving and Christmas compared to the previous year.
$8.30 to $8.90
Should investors buy the dip?
Presently, Walmart is outperforming Target. Walmart's business shift towards groceries and non-discretionary items over the years has provided it with greater resistance against consumer pressure. Furthermore, Walmart looks poised to make inroads into higher-income households, which have traditionally supported Target. Lower prices and the convenience offered by Walmart+ membership with complimentary same-day delivery appeals to these customers.
Target's same-day delivery service is also popular, but Walmart seems to be gaining the upper hand. Its wide assortment of groceries and Walmart+ membership offering free same-day delivery make it more attractive to consumers feeling the impact of inflation.
From a valuation perspective, Target's stock now trades at a forward price-to-earnings ratio (P/E) of less than 12 times next year's analyst estimates, as opposed to nearly 32 for Walmart.
Although Walmart's stock deserves a premium given its defensive nature and recent growth, the gap between the two retailers has widened noticeably. At this moment, it appears that Target shares are offered at a discount, not just compared to Walmart, but also to historic levels.
While Target is reliant on the consumer and the economy, I believe it has the potential to make a powerful comeback, presenting investors an opportunity to consider purchasing shares after this recent price drop.
Despite Target's unimpressive Q3 results and future predictions, the fall in its share price might present a potential investment opportunity for finance-savvy individuals looking to diversify their money in the stock market. With a lower price-to-earnings ratio compared to Walmart and a strong focus on addressing consumer budget constraints, Target's future financial prospects could prove to be an attractive investing proposition.
