Big-box retailer Target (TGT -0.45%) gave investors some fresh numbers to chew on Wednesday morning when the company reported its second-quarter results. Based on the stock's move higher following the earnings reports, the market seems impressed.
Shares, however, are still down about 13% this year. This begs the question: Is now a good time to buy?
Despite the market's upbeat reaction to the report, shares of Target should arguably be avoided at this price. Let's take a look at what Target reported in its quarterly update and why the stock isn't a compelling buying opportunity.
NYSE: TGT
Key Data Points
Poor sales trends
As the company laps costly inventory actions in the year-ago quarter and makes progress on initiatives to improve its gross profit margin, Target's non-GAAP earnings per share more than quadrupled year over year to $1.80. This crushed analysts' average forecast for adjusted earnings per share of $1.39.
But the report also shed light on how Target is struggling to grow sales. Total revenue for the quarter fell 4.9% year over year, as comparable sales declined 5.4%. Further, comparable digital sales fell 10.5%.
To be fair, Target CEO Brian Cornell did say during the company's earnings call that even though comparable-sales trends worsened from the second half of May into June, there was "a meaningful recovery in both traffic and comps in July." In addition, Target Executive Vice President and Chief Growth Officer Christina Hennington said the company has "started to see consumer confidence begin to recover from recent lows."
But the "lows" in consumer confidence have been low enough to weigh on Target's full-year outlook. In its second-quarter update, Target said it was lowering its full-year view for both sales and profit.
Management is now anticipating comparable sales for the rest of the year to come in at a rate "in a wide range around a mid-single digit" percentage point. In addition, management said it now expects full-year GAAP and non-GAAP earnings per share to be between $7 and $8, down from a previous forecast for $7.75 and $8.75.
Concerns for investors
While this contraction in Target's business will likely reverse whenever the economy improves, the company's need to lower its full-year view for comparable sales and profit is worrisome when viewed next to a few other concerning facets of Target's business.
One challenge is the company's net debt position, relative to its net income. Target's net debt of nearly $15 billion is more than 4x the net income analysts, on average, are expecting from Target in fiscal 2023 and 2.6 times the consensus forecast for fiscal 2024's earnings. While the retailer's business is stable enough to handle debt levels like this, the debt load will be challenging during a high-interest-rate environment.
Then there's the stock's valuation. While its price-to-forward earnings multiple of 15 is fair, it may not leave enough margin of safety for investors in case sales growth takes longer than expected to recover or competition for other big-box retailers like Walmart heats up. Further, the company's high net debt-to-earnings ratio means the stakes are high for the company to return to growth sooner rather than later.
