Recent assessments from RBC Capital Markets indicate that Target Corporation is likely to post lower comparable sales for its fiscal second quarter than market expectations. This comes as a result of continuous price investments and a weakening consumer outlook, factors that are putting pressure on financial results.
The brokerage has notably adjusted its price target for Target down to $174 from a previous $181, indicating a perceived downside risk as the company approaches its upcoming earnings results scheduled for Wednesday. RBC’s recent guidance has led to a downward revision of its second-quarter revenue outlook, now set at $25.1 billion, a decrease from $25.4 billion and falling shy of the market’s average analyst estimate of $25.22 billion according to Capital IQ.
Correspondingly, the earnings per share (EPS) outlook has also been lowered to $2.16 from a previously expected $2.20. In terms of comparable sales growth for the quarter, RBC now anticipates only a 0.8% increase, a significant drop from its earlier forecast of 2.1% and below the consensus target of 1.2%.
Notably, projections for growth from buy-side analysts are leaning towards a more optimistic 1.5%, highlighting the potential discrepancies in market expectations. Analyst Steven Shemesh has articulated concerns regarding risks associated with Target missing the buy-side expectations, suggesting that such an outcome would likely necessitate a revision of the company’s guidance downward.
He has, however, maintained an outperform rating on the stock despite these potential setbacks. Should Target report a comparable sales miss for the second quarter, it could jeopardize management’s earlier guidance, which projected a flat to 2% growth for fiscal 2024. Moreover, RBC noted that the broad EPS guidance range of $8.60 to $9.60 for the fiscal year becomes increasingly precarious with the possibility of comp softness. For this quarter, the projections indicate a 100 basis-point sequential deceleration in the food and beverage category to 3%, attributed primarily to diminishing inflation benefits and slow unit recovery post-price reductions.
Shemesh highlighted that the additional price investments represent a significant risk to the consensus positioning currently held by analysts. Examining the remainder of Target’s business, specifically its discretionary sector, analysts anticipate a minor decline in sales within the low single-digit percentage range, which Shemesh described as a 'modest step back' from more robust performance observed in the first quarter under normal business conditions. Moving onto gross margins, RBC anticipates a year-over-year increase in merchandise gross margin by 75 basis points to 27.8%, slightly surpassing Wall Street’s forecast of 27.5%.
The operating margin is also expected to see advancements of 60 basis points to 5.4%, although this remains below the 5.5% consensus estimate. In conclusion, Shemesh remarked that Target is currently in the 'latter innings of margin recapture', which in conjunction with the ongoing price investments and softer consumer sentiment, makes the future path appear cautious at best..