Target (NYSE:TGT) Misses Q2 Revenue Estimates, But Stock Soars 7.93%

Max Juang /
2023/08/16 6:36 am EDT

General merchandise retailer Target (NYSE:TGT) missed analysts' expectations in Q2 FY2023, with revenue down 4.85% year on year to $24.8 billion. The company also lowered its full-year revenue and EPS guidance. Target made a GAAP profit of $835 million, improving from its profit of $183 million in the same quarter last year.

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Target (TGT) Q2 FY2023 Highlights:

  • Revenue: $24.8 billion vs analyst estimates of $25.2 billion (1.82% miss)
  • EPS: $1.80 vs analyst estimates of $1.48 (21.3% beat)
  • EPS (non-GAAP) Guidance for Q3 2023 is $1.40 at the midpoint, below analyst estimates of $1.84
  • Free Cash Flow of $913 million is up from -$224 million in the same quarter last year
  • Gross Margin (GAAP): 28.2%, up from 22.6% in the same quarter last year
  • Same-Store Sales were down 5.4% year on year
  • Store Locations: 1,955 at quarter end, increasing by 18 over the last 12 months

"Our second quarter financial results clearly demonstrate the agility of our team and the resilience of our business model, as we saw better-than-expected profitability in the face of softer-than-expected sales. With the benefit of a much-leaner inventory position than a year ago, the team was able to quickly respond to rapidly-changing topline trends throughout the second quarter, while continuing to focus on the guest experience," said Brian Cornell, chair and chief executive of Target.

With a higher focus on style and aesthetics compared to other large general merchandise retailers, Target (NYSE:TGT) serves the suburban consumer who is looking for a wide range of products under one roof.

Big-box retailers operate large stores that sell groceries and general merchandise at highly competitive prices. Because of their scale and resulting purchasing power, these big-box retailers–with annual sales in the tens to hundreds of billions of dollars–are able to get attractive volume discounts and sell at often the lowest prices. While e-commerce is a threat, these retailers have been able to weather the storm by either providing a unique in-store shopping experience or by reinvesting their hefty profits into omnichannel investments.

Sales Growth

Target is a behemoth in the consumer retail sector and benefits from economies of scale, an important advantage giving the business an edge in distribution and more negotiating power with suppliers.

As you can see below, the company's annualized revenue growth rate of 8.88% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was decent despite not opening many new stores, implying that growth was driven by higher sales at existing, established stores.

Target Total Revenue

This quarter, Target reported a rather uninspiring 4.85% year-on-year revenue decline, missing analysts' expectations. Looking ahead, the Wall Street analysts covering the company expect revenue to remain relatively flat over the next 12 months.

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Number of Stores

A retailer's store count often determines on how much revenue it can generate.

When a retailer like Target keeps its store footprint steady, it usually means that demand is stable and it's focused on improving its operational efficiency to increase profitability. As of the most recently reported quarter, Target operated 1,955 total retail locations, in line with its store count a year ago.

Target Operating Retail Locations

Taking a step back, the company has kept its physical footprint more or less flat over the last two years while other consumer retail businesses have opted for growth. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.

Same-Store Sales

Same-store sales growth is a key performance indicator used to measure organic growth and demand for retailers.

Target's demand within its existing stores has generally risen over the last two years but lagged behind the broader consumer retail sector. On average, the company's same-store sales have grown by 2.99% year on year. Given its flat store count over the same period, this performance could stem from increased foot traffic at existing stores or higher e-commerce sales as the company shifts demand from in-store to online.

Target Year On Year Same Store Sales Growth

In the latest quarter, Target's same-store sales fell 5.4% year on year. This decline was a reversal from the 2.7% year-on-year increase it had posted 12 months ago. A one quarter hiccup isn't material for the long-term prospects of a business, but we'll keep a close eye on the company.

Key Takeaways from Target's Q2 Results

Sporting a market capitalization of $57.7 billion, more than $1.62 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Target is attractively positioned to invest in growth.

We enjoyed seeing Target exceed analysts' EPS expectations this quarter, driven by meaningful gross and operating margin expansion. That really stood out as a positive in these results. On the other hand, the company expects same-store sales to decline more than expected, causing it to lower its full-year revenue and EPS guidance. Overall, the results could've been better, but investors likely loved its increased profitability. The stock is up 8.84% after reporting and currently trades at $136.14 per share.

So should you invest in Target right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.