Target’s Q3 earnings miss the mark

Target’s customers’ shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty resulted in a third quarter profit performance well below the retailer's expectations.

The company reported third quarter GAAP earnings per share of $1.54, down 49.3% from $3.04 in 2021. Third quarter adjusted EPS of $1.54 decreased 49.1% compared with $3.03 in 2021.

"In the third quarter, our business delivered comparable sales growth of 2.7%, and we saw unit share gains across all of our core merchandise categories. This performance demonstrates the durability of our business model which continues to serve our guests and drive loyalty despite the challenging economic environment," said Brian Cornell, chairman and CEO of Target. "In the latter weeks of the quarter, sales and profit trends softened meaningfully, with guests' shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty. This resulted in a third quarter profit performance well below our expectations."

Cornell added, “While we're ready to deliver exceptional value for our guests this holiday season, supported by the decisive inventory actions we took earlier this year, the rapidly evolving consumer environment means we're planning the balance of the year more conservatively. We're also taking new actions to drive efficiencies now and in the future, optimizing our operations to match the scale of our business and drive continued growth. The strides we have made in recent years to build a truly differentiated, guest-centered retail offering, punctuated by a balanced, multi-category portfolio, positions us well to navigate in any environment. Looking ahead, we remain laser-focused on delivering the best of Target to our guests, and continuing to invest in our long-term, profitable growth."

Based on softening sales and profit trends that emerged late in the third quarter and persisted into November, the company said it believes it is prudent to plan for a wide range of sales outcomes in the fourth quarter, centered around a low-single digit decline in comparable sales. Similarly, the company is now planning a wide range for its fourth quarter operating margin rate centered around 3%.

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Target shared that it is undertaking an enterprise-wide effort to simplify and gain efficiencies across its business with a focus on reducing complexities and lowering costs while continuing to support its team. The company said it believes it can save a total of $2 to $3 billion over the next three years through this work. These savings will support the company's investments in driving deeper guest engagement and long-term growth while also delivering on its profit goals. This opportunity is enabled by the rapid growth since 2019, in which Target's total revenue has grown approximately 40%. In light of this growth, this effort is focused on fully leveraging the scale that's been gained to best-position the company to continue growing efficiently over time.

Target's comparable sales grew 2.7% in the quarter, reflecting comparable store sales growth of 3.2% and comparable digital sales growth of .3%. Total revenue of $26.5 billion grew 3.4% compared with last year, reflecting total sales growth of 3.3% and a 9.5% increase in other revenue. Operating income was $1 billion in the quarter 2022, down 49.2% from $2 billion in 2021, driven primarily by a decline in the company's gross margin rate.

Category performance was led by growth in frequency businesses such as beauty, food and beverage and household essentials, which offset continued softness in discretionary categories. Target saw unit share gains across all five core merchandising categories.

Third-quarter operating income margin rate was 3.9% in 2022, compared with 7.8% in 2021. Third quarter gross margin rate was 24.7%, compared with 28% in 2021. This year's gross margin rate reflected higher markdown rates, inventory shrink and merchandise and freight costs, net of retail price increases, compared with last year, the company said.

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Additionally, gross margin rate was pressured by increased compensation and headcount in the company’s distribution centers and the costs of managing early receipts of inventory, with a slight offset from favorable category mix, Target said.

Third-quarter SG&A expense rate was 19.7% in 2022, compared with 18.9% in 2021. This reflected the impact of cost inflation across multiple parts of the business, including investments in hourly team member compensation, which was partially offset by lower incentive compensation, Target said. 

Target said that in light of an increasingly challenging environment, it has lowered its topline and bottom line expectations for the fourth-quarter.