Target Corp. (TGT): A look at the retailer’s expectations for the near term

Shares of Target Corporation (NYSE: TGT) stayed red on Tuesday. The stock has gained 22% over the past one month. The retailer faced pressure in its most recent quarter from factors like softness in discretionary categories and inventory shrink, but it managed to improve profitability meaningfully. Here’s a look at its expectations for the upcoming quarter:

Sales and comps

Target’s total revenue declined 4.2% to $25.4 billion in the third quarter of 2023 compared to the same period last year. Comparable sales were down 4.9% in the quarter, mainly due to softness in discretionary categories.

The company believes consumers have remained resilient amid pressures from higher interest rates, student loan repayments, and higher credit card debt. Consumers are focusing on essentials and delaying their spending until the last moment.

For the holiday season, Target is focusing on providing value through promotions and price points. It is also positioning its inventory carefully in markdown-sensitive categories in order to be able to adjust easily to changes in trends.

For the fourth quarter of 2023, Target expects a mid-single-digit decline in comparable sales. As 2023 has 53 weeks, the fourth quarter will include an extra week, which is estimated to bring in about $1.7 billion in sales.

Profitability

Target delivered adjusted EPS of $2.10 in Q3 2023, which was up over 36% from last year. The bottom line benefited from lower freight costs, disciplined inventory management, and favorable category and channel mix.

Gross margin rate improved to 27.4% from 24.7% last year, reflecting lower markdowns and other inventory-related costs, lower freight, supply chain and digital fulfillment costs, and favorable category mix. These benefits were partly offset by higher inventory shrink, which represented a 40 basis point headwind to gross margin in Q3. Inventory shrink remains a significant challenge for the company.

The fourth quarter typically includes a lot of promotions. Target expects its EPS to range between $1.90-2.60 in Q4 2023, representing approx. flat growth to last year on the low end and growth of about 37% on the high end.