Shares of Target (TGT 0.18%) were moving higher Tuesday morning after the big-box chain reported sluggish fiscal fourth-quarter results, but still topped Wall Street expectations as its margins improved significantly.
Overall, the results seemed to show that Target's profitability is stabilizing after several weak quarters, and that was enough to spark a rebound in the stock, which is still down significantly from the all-time high it touched in late 2021.
As of 11:26 a.m. ET, the stock was up 11.6% on the news.
Image source: Target.
Target jumps over a low bar
The retail giant finished its first fiscal year with declining sales since 2016 as comparable sales fell 4.4% in fiscal Q4, reflecting weak demand for discretionary goods like apparel, electronics, and home goods, which make up the majority of Target's revenue.
For the period, which ended Feb. 3, revenue rose 1.7% to $31.9 billion, which beat the consensus estimate of $31.35 billion. But that top-line gain can be credited to a quirk of the company's calendar -- its fiscal fourth quarter and year included an extra week compared to 2022.
Target also showed improvements in profitability after having been plagued by inventory mismanagement issues in earlier quarters. Gross margin rose from 22.7% to 25.6%, reflecting lower markdowns and falling expenses related to freight and supply chain, and its operating margin improved from 3.7% to 5.8%.
As a result, the retailer finished the quarter with earnings per share (EPS) of $2.98, up 57% from the prior-year period, and well ahead of the consensus estimate of $2.40.
"Our team's efforts changed the momentum of our business, further improving our sales and traffic trends in the fourth quarter while driving profitability well ahead of expectations," said CEO Brian Cornell in the earnings press release.
What's next for Target
The retailer is demonstrating that it can deliver solid profits even in times of weaker demand, and investors are applauding its better-than-expected results.
Looking ahead, the company anticipates a 3% to 5% comparable sales decline in the fiscal first quarter, and earnings per share in the range of $1.70 to $2.10, compared to its EPS of $2.05 in Q1 2023, and largely worse than analysts' consensus estimate of $2.09.
For the full fiscal year, it is guiding for comparable sales in the range of flat to up 2%, and earnings per share of $8.60 to $9.60, compared to its adjusted EPS of $8.94 in 2023. The midpoint of that range is just under the analysts' consensus outlook of $9.14.
While Target's guidance was far from outstanding, more pessimism had been priced into the stock than was deserved. Still, investors are hopeful Target can return to meaningful top-line growth, which will be necessary for a full recovery in the stock price.
