What happened
On Wednesday morning, Target (TGT 1.28%) became the latest retailer to report quarterly earnings. The company had warned there was going to be some short-term pain, and that showed in the most recent quarter, which ended July 30. Target stock dropped as much as 5.2% on the news in early morning trading. By 10:40 a.m. ET, the stock gained back some of that, but remained down roughly 3%.
So what
Target got itself in an inventory bind after it stocked up as it managed a difficult supply chain environment. And it said that left it with too much of the wrong type of inventory when consumer needs changed as pandemic trends continued to shift. The company had warned that it would discount prices to purge its inventory, and said that would push its operating margin rate down to 2% in the second quarter.
Today's report revealed even worse results, as the operating margin rate was just 1.2%. Target's earnings missed expectations badly as a result -- $0.39 per share when analysts expected $0.72 -- even as revenue matched estimates. As investors digested the report, however, some promising comments from management may have led to the stock's recovery this morning.
Now what
Although the company took a big hit up front in reducing inventory to prepare itself for the upcoming holiday season, Target CEO Brian Cornell said in a statement, "Looking ahead, the team is energized and ready to serve our guests in the back half of the year, with a safe, clean, uncluttered shopping experience, compelling value across every category, and a fresh assortment to serve our guests' wants and needs."
Target maintained an earlier prediction that its operating margin would rebound to 6% in the back half of the year. Taking a short-term hit for longer-term gains is what investors should want, and any further drop in the stock could be a good buying opportunity.
