Target has rattled the entire retailing space with its forecast. Should you buy the dip?
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Targetâs (NYSE:TGT) stock has been battered in recent weeks, dropping to a 52-week low in the wake of a disappointing earnings report and forecast, despite management predicting a rebound in the latter half of the year. Is now the time to buy?
Bottoming Out or a Sign of Looming Recession?
While much of the retail sector has been dragged lower in recent weeks by heightened concern that a recession is looming, Targetâs stock has fared worse than many of its competitors.
As of Thursday evening, Target shares had plunged 31% over the past 30 days, while Walmartâs (WMT) had dropped 20%. Costco (COST) and Kohlâs (KSS) stocks have both slid 6%, while BJâs (BJ) shares have inched up fractionally and The TJX Companiesâ (TJX) have risen 5%.
Targetâs stock has yet to rebound from its Q1 earnings report, released on May 18. Although the company reported better-than-expected revenue, Targetâs bottom line fell significantly short of consensus estimates due largely to increased costs. The company also said it was now expecting Q2 operating margins of around 5.3%, with a full-year rate of roughly 6% and revenue growth in the low to mid-single digits range.
Investors reacted viscerally to the report, driving shares down 25% during the May 18 session to close at $161.61.
Target shares have remained under pressure ever since, with the stock hitting a 52-week low of $145.51 on May 24, a 46% drop from a 52-week high of $268.98 reached on Nov. 15 of last year.
Investors were further rattled on June 7 when the company issued a revised forecast due to unexpected weakness in certain discretionary spending categories, particularly home goods.
As a result, Target said it was planning to âright-sizeâ its inventory by implementing additional markdowns and cancelling orders. It added that it was working with suppliers to shorten transportation distances and lead times, adding incremental holding capacity near US ports to increase flexibility in its supply chain, and adjusting prices to reflect escalating fuel and transportation costs.
While Target reaffirmed its previous 2022 revenue growth guidance, it said it was now expecting Q2 operating margins of 2%, compared with the Streetâs consensus estimate of 6.5% and the companyâs earlier forecast of around 5.3%. The retailer added that it expected margins to rebound in the second half of the year to 6%.
Is TGT a Buy?
Following Targetâs guidance revision, analysts at Bank of America lowered their rating of the stock to Hold from Buy, citing in part concerns about discretionary spending.
"We believe the uncertainty in 2H margins given sales mix could continue to be unfavorable as competitors may also be clearing merchandise,â the analysts wrote in a note on June 8. âThis could restrain TGTâs valuation given the current low valuations of many leading discretionary category retailers and TGTâs higher relative exposure to those categories.â
Target delivered much happier news on June 9 when it announced it was raising its quarterly dividend by 20% to $1.08 per share. But investors brushed off the news, with the stock closing down around 1%.
Analysts, on average, rate Target as a Buy. Of the 30 analysts tracked by Seeking Alpha, 19 rate the stock a Buy, 11 a Hold and none a Sell. SA authors, on the other hand, rate it a Hold.
As of June 10, Seeking Alphaâs Quant Ratings have a cautious view, with the stock rated as a Hold. While Target was given an A+ for profitability, it received a C- for valuation and momentum, a D+ for growth and a D for revisions.
For a more bullish view of Target, check out Seeking Alpha contributor Bill Zettlerâs âTarget vs. Walmart Stock: Which Is the Better Buy?â For a more bearish take, read SA contributor Albert Linâs âTarget: Too Much Inventory, Stay on the Sidelinesâ.