Target’s Second Quarter Results Underwhelm

Target’s profit missed Wall Street’s expectations dramatically, particularly when comparing to … [+] yesterday’s Walmart Q2 results which beat Street expectations.

Getty Images

Target’s second quarter earnings missed Wall Street’s expectations dramatically, particularly when comparing to yesterday’s Walmart Q2 results which beat Street expectations. Wall Street expected $.72 earnings per share (EPS), but Target could only eek out $.39 EPS compared to an EPS of $3.65 in 2021.

“The vast majority of our inventory right-sizing costs have already been incurred,” Chief Financial Officer Michael Fiddelke said in a briefing with reporters. “We feel really good about our inventory position heading into the back half of the year.”

Target’s second quarter showed continued sales growth in all five of its core merchandising categories. Comparable sales grew 2.6% on top of last years 8.9% growth in the same period. Store comp sales grew 1.3% on top of 8.7% last year, while digital comp sales grew 9% on top of 2021’s growth of 9.9%. Gross margin pressure continued, with a rate of 1.2% due to inventory reduction, and higher freight and transportation costs.

Guidance for the last half of 2022 remains “cautious” but consistent with prior guidance of low- to mid-single digit with an operating margin of around 6%. Second quarter operating income margin rate was 1.2% in 2022, compared with 9.8% in 2021. Second quarter gross margin rate was 21.5%, compared with 30.4% in 2021.

Back To School (BTS) Spending

While it is undeniable that BTS spending began for many in the second quarter, it will likely color sales and earnings in the third quarter for both Target and Walmart. The advanced spending was no doubt motivated by early concerns of stock-outs in the category.

According to Deloitte, “Back-to-school spending is expected to reach a new high, up to $34.4 billion for K-12 students, or approximately $661 per student; back-to-college shoppers are expected to spend $28.3 billion, or approximately $1,600 per student, a 10% increase over 2021.”

For K-12, after last year’s pandemic-fueled tech spree, this year will focus more on clothing, which Deloitte predicts will be up 18% year-over-year, while school supplies are expected to be up 7%. Technology spending is set to decline 8% this year for respondents, as many parents purchased needed technology supplies last year to meet virtual or hybrid learning needs.

Stockouts a were also a concern for college shoppers, which drove substantial spending by the end of July. Unlike K-12, digital integration in higher education is expected to push college tech spending up 22% year-over-year, compared with 2021’s 16% growth. Spending for household appliances and supplies are predicted to rise 12%, and clothing is expected to be up 10%. Only dorm or apartment furniture is expecting to contract by 15%.

BTS Foot Traffic Challenges

According to Placer.ai July foot traffic for both Target and Walmart have been down 2.9% and 2.7% respectively, compared to healthy 2021 comps. In July 2021 visits to both Target and Walmart were up 17.4% and 17.8% respectively over 2020 and up 15.9 % and 2.9% respectively over 2019.

So, it is fair to say that the combination of gas prices, hyperinflation and strong previous comps played a role in the foot traffic shortfall. It will remain to be seen if reported larger basket sizes and a desire to concentrate shopping in fewer trips will compensate for the slight drop in foot traffic. I am betting it will.

Target Merchandising Prowess Is First in Class

For back-to-school 2022, Target moves to the front of its class.

Sanford Stein

For back-to-school 2022, Target moves to the front of its class. Target typically excels at holiday, and special event merchandising treatments, usually remerchandising a set area for the event.

This year they went beyond for BTS, engulfing the entire store in a cohesive back-to-school campaign, including very compelling graphics and visual merchandising treatments. Both K-12 and back-to-college marketing and merchandising efforts were celebrated in Target style, with both “open sell” and the product vignettes telling the story well.

Target enveloped the entire store in its back-to-school and back-to-college merchandising effort.

Sanford Stein

It remains to be seen whether the Target BTS effort along with fall fashion introductions and the anticipated Halloween merchandising onslaught helps right the Target ship. With the over merchandising corrections in the rear-view mirror, third quarter results should provide a boost for Target’s top and bottom line.