Investors are feeling cautious heading into Target's (TGT -0.05%) fourth-quarter earnings report. The retailer was a huge beneficiary of consumer shopping changes during earlier phases of the pandemic, but there might be a pullback ahead. Many of its peers in this winning group have recently warned of slowing growth and surging costs in 2022.
Target might have similarly conservative comments about the new fiscal year. But investors will get a clearer picture of the business by following market share, inventory, and cash flow trends.
Let's take a look at the announcement set for March 1.
Beating back rivals
There are some big factors working against Target's growth potential this quarter. Sales soared a year ago, setting the bar high for this holiday period. Supply chain challenges and inflation could have pressured sales, too. We know from Walmart's recent report that the retailer scooped up inventory and broadened its pricing advantages against peers in late 2021.
We'll find out soon whether Target took a market share hit from this shift. Heading into the report, most investors are looking for the chain to achieve just a modest growth slowdown in Q4. Comparable-store sales should land at around 10% compared to 13% in the previous quarter.
Image source: Getty Images.
Margin challenges
Walmart just reported a modest profitability increase, and investors would love to see the same news from Target in early March. The key number to watch here is operating margin, which took a small step lower to 8% of sales last quarter but has been climbing to record highs.
TGT Operating Margin (TTM) data by YCharts
Target has several ways to lift this metric over time, including its popular same-day delivery services and its exclusive, higher priced merchandise. The chain relied on these assets to capitalize on free-spending shopping behavior through most of 2021.
But it's possible that the advantage weakened as inflation sped up and consumers started focusing more on prices. Lower margins would be surest sign of this reduced pricing power.
The new outlook
The big worry heading into this announcement is that Target will forecast a tough operating year ahead as consumers reverse many of the behaviors and spending priorities they favored during the pandemic. The retailer's lucrative home delivery and e-commerce platforms might be less appealing. Its home furnishings categories could attract less demand after two straight years of big gains.
Still, look for CEO Brian Cornell and his team to sound confident about the bigger picture. Sure, sales gains might slow to near zero in 2022 after double-digit spikes in each of the last two years. Target's earnings will look weaker as it spends more on its supply chain, labor, and pricing.
But the chain is undeniably much stronger today than it was before the pandemic struck. A far larger sales footprint is just one part of that success, that also extends to profitability, cash flow, and a world-class omnichannel selling platform.
These factors should make it easier for Target to extend its market share momentum into 2022, even though investors might find a few of its financial forecasts jarring compared to this past year.
