Target (TGT, Financial) shares dropped 7% after the company reported its Q1 results. This marked the end of Target's streak of five consecutive quarters of significant EPS beats, as it posted a slight miss this time. Revenue declined by 3.2% year-over-year to $24.14 billion, which was also below expectations. The Q2 EPS guidance was in-line at $1.95-2.35, though the mid-point was below consensus. Target reaffirmed its FY25 EPS guidance at $8.60-9.60, providing some encouragement after the Q1 shortfall.
- Q1 same-store comps were -3.7% (in-store -4.8%; digital +1.4%), better than the prior guidance of -5% to -3% and Q4's -4.4% and Q3's -4.9%. However, it still lagged behind Walmart's (WMT, Financial) US Q1 comp of +3.8%. Walmart has higher exposure to groceries, while Target is more focused on consumer discretionary items, which have been weaker.
- Target noted that Q1 comps were affected by continued softness in Home and Hardlines categories and softening trends in frequency categories. However, the Beauty segment stood out with a low single-digit comp, driven by strength in Ulta Beauty at Target. Discretionary trends, especially in Apparel, showed meaningful improvement.
- For Q2, Target guided comps of +0-2%. After several quarters of negative comps, positive territory would be a welcome change. Full-year comp guidance was reaffirmed at +0-2%, following a -3.7% comp decline in FY24. This indicates an expected improvement in comps later in the year.
- Q1 operating margin improved to 5.3% from 5.2% a year ago but fell from 5.8% in Q4. Target benefited from favorable freight rates and other cost savings, offsetting higher promotional markdowns. Additionally, there was a 20 bps benefit from category mix and a 20 bps benefit from improved inventory shrink. Target is optimistic about plateauing shrink rates and appreciates the growing focus on retail theft at various government levels.
- Target's view on the consumer remains largely unchanged, noting that consumers are surprisingly resilient despite high prices. However, consumer confidence dipped in April despite a strong job market and normalizing inflation. Target remains cautious about its near-term growth outlook, expecting discretionary trends to remain pressured in the short term but to normalize over time.
Overall, investors are disappointed with Target's Q1 results. The EPS miss was unexpected after a series of significant beats, and the Q2 guidance was lackluster. However, there were positives, such as comments about the resilient consumer and improvements in discretionary trends, which Target needs to close the performance gap with Walmart. If discretionary spending improves, Target could narrow this gap.
