By Siddharth Cavale and Ananya Mariam Rajesh
(Reuters) -Target on Wednesday forecast holiday-quarter profit largely above Wall Street expectations as the big-box retailer benefits from easing supply-chain costs and its efforts to control inventory start to pay off, sending its shares up 17% in morning trading.
Target’s stock has lost a quarter of its value in a turbulent year marked by elevated inflation. Shoppers have squarely focused on food and essentials, while showing reluctance to spend on home goods, electronics, toys and apparel that are deemed less essential.
With nearly half of Target’s sales coming from these less essential categories, its sales have fallen in the past two quarters, but the retailer has been about to eke out a higher profit on tighter inventory management and cost controls in other parts of its business, such as logistics.
On Wednesday, the company forecast adjusted earnings to land between $1.90 and $2.60 per share. The midpoint of that range topped analysts’ expectations of $2.22 per share, according to LSEG data.
The Minneapolis-based retailer said the forecast follows a third quarter in which margins improved, helped by fewer discounts, a 14% reduction in inventories and related costs, and lower freight, supply-chain and delivery expenses. Seasonal merchandise for events such as back-to-school and Halloween outperformed other parts of its business, it added.
Gross margins in the fiscal third quarter ended Oct. 28 rose to 27.4%, from 24.7% a year earlier. The company also posted a smaller-than-expected drop of 4.9% in comparable sales for the quarter, compared with estimates of a 5.25% decline, helped by demand for beauty products, which generates about 30% of sales.
Excluding items, Target earned $2.10 per share in the quarter, topping expectations of $1.48.
“(Target’s) print is better-than-expected nearly across the board, but does not change the fact that the consumer backdrop seemingly deteriorated throughout the quarter,” RBC Capital Markets analysts wrote in a post-earnings note.
The National Retail Federation predicts U.S. holiday sales in 2023 to rise at the slowest pace in five years. Home Depot on Tuesday tightened its sales forecast for the full-year but still expects it to decline between 3% and 4%.
Target said on Wednesday it expects holiday-quarter comparable sales to decline in the mid-single-digit percentage range, compared with expectations of a 3.97% drop.
The company said it plans to offer more than 10,000 new items for the holidays, which will feature exclusive-to-Target brands and more than 2,500 toys priced below $25.
Target shares are down 25.7% so far this year, in part due to other unique challenges it faced this year including backlash in May over its LGBTQ-themed merchandise and a spike in retail thefts that it said led it to shut nine stores in New York, San Francisco, Seattle, and Portland, Oregon.
By contrast, rival Walmart’s shares have risen 18.2% rise. The retailer reports third-quarter results on Thursday.
(Reporting by Siddharth Cavale in New York and Ananya Mariam Rajesh in BengaluruEditing by Matthew Lewis and Chizu Nomiyama)
