While its stock managed to rise following its fiscal first-quarter earnings report last week, there was not much to cheer about with Target's (NYSE: TGT) latest results. The company has been losing ground to rivals such as Walmart(NYSE: WMT), Costco Wholesale(NASDAQ: COST), and Amazon(NASDAQ: AMZN), which have all been reporting better sales growth over the past few years.
Last quarter, the company saw its same-store sales drop, in part, due to pushback from customers after the retailer rolled back its diversity, equity, and inclusion (DEI) programs. The company was far from the only one to take such actions following the election of President Donald Trump, but it had taken a lead in these initiatives in the past, so its reversal angered some of its customer base. This included the company facing a 40-day boycott from some customers during Lent.
To throw fuel on the fire, the company also warned about the impact of tariffs, as well as "heightened uncertainty regarding the economy and consumer spending."
Image source: Getty Images.
Poor fiscal Q1 results and guidance
The first-quarter numbers for Target certainly were off target. The company's revenue sank nearly 3% year over year to $23.8 billion, as its same-store sales fell 3.8%. Traffic declined 2.4%, while the average ticket decreased by 1.4%.
E-commerce sales rose by 4.7% year over year, but in-store comparable-store sales fell by 5.7%. Over 80% of Target's sales come from stores, so this channel has a much bigger impact on same-store sales. Lower sales at stores also reduce operating leverage, and as such, Target's adjusted earnings per share (EPS) plunged 36% to $1.30.
The only category to see an increase in the quarter was food and beverage, which edged up 0.8%, while beauty was about flat. However, the company said it was able to hold or gain share in 15 of 35 sub-merchandise categories it tracks, noting particular strength in apparel categories such as women's swimwear, performance, and toddler.
Another area of strength was its Roundel digital advertising business, which saw revenue climb 25% year over year to $163 million. It also saw mid-single-digit growth in its first-party e-commerce business, with same-day delivery surging by 36% and accounting for nearly half of its total digital sales. Its third-party digital marketplace, meanwhile, saw double-digit growth. However, these businesses are still too small to really help offset the pressure Target is seeing in its core in-store business.
Gross margin slipped 60 basis points year over year to 28.2%. Management said this was due to markdowns and higher digital fulfillment and supply chain costs.
Looking ahead, Target slashed its full-year earnings guidance, taking it to a range of $7 to $9 per share from a prior outlook of $8.80 to $9.80. Meanwhile, it's now looking for sales to decline by low single digits after previously forecasting a modest increase.
Metric
Original Guidance
New Guidance
Adjusted EPS
$8.80 to $9.80
$7.00 to $9.00
Sales growth/decline
1%
a low-single-digit decline
Data source: Target.
The company said its updated guidance takes into account potential tariff impacts and revenue pressure. It will look to manage its business to maintain healthy margins and inventory levels. It said it is also working to diversify the country of production of the products it sells.
Is it time to buy the dip?
While its shares edged up after its earnings report, the stock is still trading down about 30% on the year and is well off its post-pandemic highs when it traded for over $260 a share. This is in stark contrast to Walmart and Costco, which are both up on the year and not far from all-time highs.
Target's problems started well before the recent issues of DEI protests and tariffs. However, it is more exposed to tariffs and weaker consumer spending than companies such as Walmart and Costco, because it still sells a much higher percentage of discretionary merchandise than these two peers.
From a valuation standpoint, Target stock trades at a huge discount to other leading retailers with a forward price-to-earnings ratio of less than 12 times this year's analyst estimates.
The problem is that Target has just been underperforming, while its large retail peers have been thriving. The stock could do well if the economy began to boom and consumer spending picked up given its exposure to more discretionary items. However, it's hard to ignore the company's years of underperformance, and it's becoming difficult to see how it rights the ship.
As such, I would not go bottom fishing on the stock, despite the large valuation gap.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.
