Target (TGT +0.64%) isn't due to announce its next quarterly update for a few weeks, but investors are already busy making projections about the struggling retailer's business. On average, Wall Street pros expect sales to fall by about 1% year over year for the selling period that runs through late July following a flat result in the previous quarter.
Target is dealing with major sales and earnings challenges stemming from a sharp demand shift away from merchandise categories that were booming during the pandemic. Yet inventory levels are down, potentially setting the business up for a solid rebound over the next few quarters.
Against that mixed backdrop, let's take a look at the possibilities ahead for this retailer over the next year.
The latest trends in retail
Target's mid-August earnings report will be watched closely for signs that demand has finally stabilized. Comparable-store sales were up a disappointing 1% last quarter, mainly thanks to softness in areas like home furnishings and decorations. Customer traffic rose at the same sluggish rate.
NYSE: TGT
Key Data Points
Contrast those results with Walmart, which saw a 3% traffic boost in Q1 and enjoyed a 7% comps increase, and you'll see the main drawback of Target's focus on consumer discretionary products.
Still, Target executives said the early 2023 results were slightly above their expectations of a tough sales year ahead. "We saw an increase in guest traffic in Q1, with total sales increasing and profitability ahead of expectations," CEO Brian Cornell said in a press release.
The big concerns for Target
Inventory levels have been dropping steadily, which puts Target in a great place to begin boosting operating profit margin back toward the 6% level that the company enjoyed before the pandemic. There could be more sales promotions ahead, though, as peers in the consumer discretionary space including Home Depot and Best Buy have recently noted continued softness in demand for the types of products that Target sells. It's hard to see a scenario in which Target's stock trounces the market this year without a rebound in demand for its core categories like home furnishings and apparel.
Management in mid-May warned that there's a large potential range for sales in Q2, with comps likely declining at a low single-digit rate. Earnings will be positive again, but profitability might hold flat at about 5% of sales.
TGT Operating Margin (TTM) data by YCharts
The good news is that investors are getting a solid discount on the stock price that reflects these financial challenges. You can own Target stock for 0.6 times annual sales today compared to Walmart's P/S ratio of 0.7. It's highly likely, too, that the company will recover its prior earnings power thanks to the combination of lower inventory, rising prices, and slowing cost inflation.
Still, investors might want to wait for the next quarterly update before jumping into this rebound story. Target is facing challenges that could continue pressuring the stock over the next year, and there isn't any clarity about stabilizing growth trends to date. Keep the retailer on your watchlist, but not necessarily in your portfolio if you're not especially bullish about economic growth rates today.
