Target's (TGT -0.73%) stock is down 24% in 2022. After an impressive streak of sales and profit growth since the pandemic's onset, the company is experiencing a hangover. This year, consumers quickly changed their spending patterns, which caught the retailer off-guard.
Unsurprisingly, some investors wonder whether the dip in its stock price is a buying opportunity or a justified decrease in an inflated valuation. Let's look at Target's second-quarter results and determine whether investors should add it to their portfolios now.
Target's profits fall as it slashes prices
Comparable-store sales, which exclude the impact of new store openings and closings, rose 2.6% in Target's second quarter. In itself, the figure is mediocre. However, when considering that the company was implementing an aggressive cost-cutting campaign to rid itself of unwanted inventory, a sales increase of just 2.9% was not a good sign for the quarter ending in July.
The slashing of prices led Target's operating income to fall by over 87% versus the prior-year period. Recall that this time last year, retailers complained about not having enough inventory to satisfy an insatiable consumer appetite. Limited availability allowed Target to charge premium prices for its items, allowing earnings per share to rise by 63% in its last fiscal year.
Oh, how times have changed. Economic reopening, widespread inflation, and a shift to spending on services over goods have Target stuck with considerably more inventory than it would like. Despite its efforts, as of July 30, Target had $15.3 billion of merchandise, more than $4 billion higher than the $11.3 billion it held at the same time the year before. Management told investors during the conference call following the earnings release on Aug. 17 to look beyond the value of inventory. It noted that its actions to rid itself of unwanted inventory are working and that the total value of merchandise didn't change because the mix of products shifted.
Target moved away from discretionary categories to focus more on frequency categories like food, beverage, and cosmetics. Overall, the company feels confident that most of its cost-cutting actions are behind it. It can move forward with a normalized operating procedure now that it has the right kind of products on the shelves.
Is Target's stock a buy?
Near term, Target's stock comes with heightened risks, as it's uncertain whether management's price-slashing strategy is complete. The company thrived at the pandemic's onset due primarily to short-term factors that are now reversing. Meanwhile, its stock is not relatively cheap when measured by its price-to-sales ratio of 0.8. Investors may have an opportunity to buy Target at a lower price in the coming months or at a similar price but with more inventory risks resolved. The dip in Target's stock does not make it a buy.