Target management is planning for a challenging consumer environment in 2023. A solid 4Q headline for TGT, EPS at $1.89 vs $1.40, comps of 0.7% vs street at -1.6% with stores performing and ecommerce contracting while lapping omicron. The sales beat makes sense given the prior elevated inventories, gross margin was down 300bps yy, missing street expectations by ~110bps. Part of the margin pressure was again from the company working to get inventories in check, which it finally has as it came in down 3% with comps up 1%. That’s still not a great spread on a vs 2019 basis, though it’s a good portion of food inventory alongside food inflation, as the company noted inventory in discretionary categories is down 13% yy. That level perhaps sounds bullish in the context of the inventory problems of the last 9 months, except that it is a very negative signal around expected sales trends in those categories. The inventory isn’t currently there for a big revenue beat should the consumer ‘want’ to spend. TGT knows this will be a tough discretionary consumer environment in 2023, particularly in the next couple quarters (at least). The company guided to a sizeable cut in EPS vs the street for the full year, though perhaps a bit aggressive on revenue vs conservative on margin as we see it. Maybe there is some room on cost cuts/management in different revenue scenarios around the company’s signaled $2 to $3bn in cost savings potential, which had a smaller than expected role in the Investor Community presentation/discussion. EPS estimates for 2023 have gone from $12 at the end of October to now $8.25 at the midpoint. Note 2022 was the abnormally depressed margin year… 2023 should be getting closer to real earnings potential, albeit with a weak consumer, but there’s nothing to say we’ll see a rapid consumer ramp by 2024, we only expect less bad, especially given we’re dealing with the first inflation problem in half a century. TGT is now guiding to a recovery over the coming few years to a 6% operating margin vs the old market expectation of 8%, and without a specific timeline. The company is talking about increased investment in speed of shipping and fulfillment capability beyond stores, something we’ve said it needed to be focused on for years. We think it will take longer than the market expects to get back to a 6% level. The stock is trading at ~21x the mid point of EPS. That leaves TGT as expensive, with slowing trends, and a challenging discretionary consumer environment which we expect to continue to get worse in the next couple of months. We think this stock still has to head lower.
