What happened
Target Corporation (TGT +2.51%) shares shed 11.5% of their value in the first half of the year, according to data provided by S&P Global Market Intelligence, more than unwinding its bullish start to 2023. All told, shares are now down 27.6% from their early February peak. Lackluster quarterly results paired with a warning about the remainder of the year are responsible for most of that weakness.
So what
Investors recognize that economic malaise -- stemming from inflation -- is working against consumer-facing companies right now. They just didn't seem to expect it to take the size of the toll it's taking on perennial winner Target.
The numbers: The retailer's top line grew an anemic 0.5% year over year during the three-month stretch ending in April, while same-store sales only improved 0.7%. Revenue of $25.3 billion and earnings of $2.05 per share both topped estimates (although just barely for sales). But, per-share earnings slipped from the year-ago comparison of $2.16.
NYSE: TGT
Key Data Points
Then things took an even more troubling turn. During the first-quarter earnings call held in mid-May, CEO Brian Cornell noted, "Pressure from inflation and rising interest rates affected the mix of retail spending in Q1 with a further softening in discretionary categories in the March and April time frame. ... These continued signs of caution among consumers have reinforced why we enter this year with a conservative inventory position."
Adding insult to injury, Cornell went on to say in Target's first-quarter press release that "We now expect shrink will reduce this year's profitability by more than $500 million compared with last year. While there are many potential sources of inventory shrink, theft and organized retail crime are increasingly important drivers of the issue." This backdrop doesn't leave investors feeling like they have much to look forward to, hence the stock's pronounced weakness thus far this year.
Now what
The economic and operational headwinds are temporary, of course. They always are. Target is a solid company with a long track record of success. And it will be again. It's not particularly well-suited for economic lethargy, though.
See, this store chain tends to appeal to shoppers with a little bit of discretionary money to spend and who may not be quite as concerned with price or value. It's going to lose business to more value-oriented retailers until inflation is well-tamed and consumers feel more confident about the foreseeable future. There's no way of telling how long that might take, however.
For now, Target is a name best left on your watchlist rather than in your portfolio.
