earnings for Target (TGT)–sales down, margins and earnings up

As I’m writing this, the stock is up about 17% on the news.

So you know where I stand, I’ve owned the stock for a long time. I just added some a day or two ago, on the idea that the company’s had been (uncharacteristically) pummeled by Walmart’s over the past year and was trading at a huge PE multiple discount to WMT. I figured that sooner or later we’d see some mean reversion. To be clear, I didn’t expect it to start so soon …and that I’d have a chance to add more.

how I read the quarter

During the three month period, overall sales were down, year-on-year. Discretionary items were down, staples and own-brands up. Margins were up significantly, as well.

I don’t think this is a story of shoppers who had traded down to WMT during the pandemic trading back up again. The strength of own-brand sales argues strongly against this.

Instead, I think the market–abetted by limited information released by TGT management–very substantially underestimated the extent of the losses incurred by TGT by overstocking/overpaying for pandemic-era consumer electronics and other stay-at-home goods to put on the shelves during covid. Of course, coming 100% clean would have made it that much harder and more expensive to recover from this mistake. The numbers say to me that it’s just in the past quarter that TGT has finally gotten these excess inventories under control. Getting past this negative is also why it would be reasonable to expect the company to make higher profits on lower sales during the holiday season–no more big-ticket item sales at no profit or at a loss.

At some point–who knows when–it’s also possible that in a period of economic strength customers will do what they typically do in expansions and trade back up to the retailers they frequented when they were feeling more flush. This would presumably be good for TGT and neutral-ish for WMT, which would presumably lose customers to TGT but gain back a bunch from the dollar stores.

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