Target shares jump after retailer posts a big earnings beat, even as sales fall again

Target on Wednesday topped Wall Street’s quarterly sales expectations and blew past earnings estimates, as purchases in high-frequency categories like food and beauty helped prop up weaker customer spending. 

Shares of the company rose more than 10% in premarket trading on the news, partially a reflection of the stock’s drop so far this year.

Yet the big-box retailer stared down the same challenges that it has faced over the past year. Shoppers aren’t buying much more than the necessities. They’re hungry for lower prices. And when they do make purchases, they’re postponing them – such as waiting until the temperature drops to buy a pair of jeans or a sweatshirt, CEO Brian Cornell said.

For the second straight quarter, Target’s comparable sales declined. The industry metric, also called same-store sales, takes out the impact of store openings, closures and renovations. 

Chief Financial Officer Michael Fiddelke said on a call with reporters that the Minneapolis-based company is “laser focused on moving both traffic and sales back into positive territory.”

Yet he and Target’s leadership team cautioned that won’t happen this year, even as holiday shoppers hit stores and websites for decorations, gifts and more.

Here’s what the retailer reported for the fiscal third quarter ended Oct. 28 compared with what Wall Street was anticipating, based on a survey of analysts by LSEG, formerly known as Refinitiv:

• Earnings per share: $2.10 vs. $1.48 expected
• Revenue: $25.4 billion vs. $25.24 billion expected

Sales have slowed across the retail industry as consumers feel a budget crunch from elevated prices and choose to spend on experiences instead. Yet Target, which sells a heavier mix of clothing, home goods and impulse purchases than key rivals, has been particularly squeezed. 

Plus, it has faced its own challenges. Target got blowback for a collection of merchandise for Pride month, a celebration of LGBTQ+ people and issues, that it has sold for more than a decade. It got hit by higher levels of organized retail crime. And it recently shuttered nine stores in major cities, blaming the closures on theft and threats of violence.

Target’s stock has suffered, too. It had fallen nearly 26% this year as of Tuesday’s close, with its value cut by more than half since the highs of the Covid pandemic.

In the third quarter, Target’s total revenue fell from $26.52 billion in the year-ago period. Comparable sales dropped nearly 5% year over year, as customers bought fewer discretionary items. Digital sales declined by 6% compared with the year-ago period.

While discretionary categories remain soft, Chief Growth Officer Christina Hennington said trends “improved markedly” compared to the fiscal second quarter. She chalked up those better results to trendy merchandise, including Target’s new brand of kitchenware, fall fashion apparel for women and jewelry from its new line with Kendra Scott.

The retailer showed progress in building back its profits despite the sales challenges. Its net income in the third quarter jumped about 36% to $971 million, or $2.10 per share, from $712 million, or $1.54 per share, a year earlier. Total revenue fell from $26.52 in the year-ago period.

The big-box retailer said it expects the holiday quarter to look roughly the same, with comparable sales in a range of around a mid-single digit decline and adjusted earnings per share of $1.90 to $2.60.

But Target’s significant earnings gain in the third quarter also reflected its weakness in the year-ago period, when it canceled orders and sold merchandise at deep discounts to clear through a glut of unwanted inventory. It took that aggressive action to try to get ahead of last holiday season. 

Fiddelke attributed Target’s improved profits to better management of inventory and expenses, rather than stronger sales. Inventory levels declined 14% at the end of the quarter compared to the end of the year-ago quarter, when the company had lots of excess merchandise.

“A store can run more efficiently when their back rooms are free of inventory,” he said. “A distribution center runs more efficiently, with fewer touches, when it’s not as full, too.”

As it shows progress with inventory, Target is now trying to boost sales in the critical holiday quarter.

This week, shoppers can already see Target’s website plastered with Black Friday deals. Yet Cornell said it’s too soon to weigh in on early holiday sales, saying the company is “watching the trends carefully.”

To drum up sales during the season, Hennington said the retailer will lean on new and exclusive merchandise – including thousands of gifts under $25.