Target Q3 sales edge up amid earnings plunge

Atop double-digit gains a year earlier, Target Corp. generated net and comparable sales growth in the fiscal 2022 third quarter, but earnings sank amid consumer economic concerns and the company’s ongoing efforts to “rightsize” inventory and costs.

For the quarter ended Oct. 29, net sales edged up 3.3% to $26.12 billion from $25.29 billion billion a year ago, when sales surged 13.2%. Total revenue came in at $26.52 billion, up 3.4% year over year, Minneapolis-based Target reported Wednesday.

Third-quarter comp sales rose 2.7%, reflecting increases of 3.2% for stores and 0.3% for e-commerce, Target said. That compared with total comp-sales growth of 12.7% (9.7% in stores and 28.9% in digital channels) in the fiscal 2021 quarter.

Basket size grew 1.3% in the 2022 quarter, compared with a 0.2% dip in the prior-year period, and transaction count inched up 1.4%, well below the year-ago gain of 12.9%.

Stores accounted for 82.9% of sales and fulfilled 96.8% of orders in Q3, compared with 17.1% and 3.2%, respectively, from digital — about the same as a year ago.

Target noted that all five of its core merchandise categories — apparel and accessories, food and beverages, beauty and household staples, home furnishings and decor, and hardlines — tallied unit volume gains in the quarter, with frequency-oriented segments like beauty, food and beverages, and household essentials as the key comp-sales drivers. On a comparable basis, own-brand sales — including the Good & Gather (grocery), Everspring (household items) and Kindfull (pet food) brands — gained at twice the enterprise Q3 growth rate, the retailer said.

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According to Target Chairman and CEO Brian Cornell, recent changes in shopper purchasing habits impacted both the top and bottom lines.

“In the third quarter, our business delivered comparable sales growth of 2.7%, and we saw unit share gains across all of our core merchandise categories. This performance demonstrates the durability of our business model, which continues to serve our guests and drive loyalty despite the challenging economic environment,” Cornell said in a statement. “In the latter weeks of the quarter, sales and profit trends softened meaningfully, with guests’ shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty. This resulted in a third-quarter profit performance well below our expectations.”

On the earnings front, Target posted third-quarter net income of $712 million, or $1.54 per diluted share, compared $1.49 billion, or $3.04 per diluted share, a year ago. Adjusted EPS came in at $1.54 per diluted share versus $3.03 per diluted share in the prior-year period.

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Analysts, on average, had forecast Target’s third-quarter adjusted EPS at $2.13, with estimates ranging from a low of $1.89 to a high of $2.42, according to Refinitiv.

Private brands remain a sales catalyst and during the third quarter doubled the enterprise growth rate, Target noted.

In reporting bottom-line results, Target said it has embarked on a companywide initiative to “simplify and gain efficiencies” across its business, focusing particularly on “reducing complexities and lowering costs” while maintaining support of associates. The retailer estimates that, over the next three years, the effort can drive $2 billion to $3 billion in savings that could support investments in “deeper guest engagement” and long-term growth while delivering on profit objectives.

Target pointed out that its rapid growth since 2019, in which overall revenue surged 40%, laid the foundation for the plan to bolster efficiencies and fully leverage the retailer’s increased scale.

“While we’re ready to deliver exceptional value for our guests this holiday season, supported by the decisive inventory actions we took earlier this year, the rapidly evolving consumer environment means we’re planning the balance of the year more conservatively. We’re also taking new actions to drive efficiencies now and in the future, optimizing our operations to match the scale of our business and drive continued growth,” Cornell explained. “The strides we have made in recent years to build a truly differentiated, guest-centered retail offering, punctuated by a balanced, multi-category portfolio, positions us well to navigate in any environment. Looking ahead, we remain laser-focused on delivering the best of Target to our guests, and continuing to invest in our long-term, profitable growth.”

In light of softening sales and profits from late Q3 that have persisted into November, Target said it’s planning for a “wide range of sales outcomes in the fourth quarter,” centered on a low-single-digit comp-sales decrease. The company is taking a similar approach to Q4 operating margin, with an expected rate centered around 3%. Target said its Q3 operating margin rate of 3.9% “improved meaningfully” versus the Q2 rate but “fell far short of expectations.”

“Q3 top line came in better than expected, driven by healthy traffic and ticket growth. However, gross margin pressures (due to higher markdowns and elevated expenses) drove the EPS miss, and Target’s Q4 guide was below expectations,” Jefferies analyst Corey Tarlowe said in a research note on Wednesday. “While some elements of risk still exist (as seen by Q3 results and Q4 guide), we continue to believe Target is better-positioned in the current macro backdrop than the broader retail set.”

As of Oct. 29, Target had 1,941 stores overall, compared with 1,924 a year earlier and 1,937 at the end of the 2022 second quarter. Of the retailer’s brick-and-mortar base, 1,522 stores are 50,000 to 169,999 square feet, 274 locations are 170,000 square feet or more, and 145 stores are 49,999 square feet or less. Ten of the 17 net-new locations versus a year ago are small-format stores of less than 50,000 square feet.