Target Corp. shares kept falling on Tuesday, as investors seemed to be worried that the company’s recent announcement of price cuts could mean that sales and profit margins will be lower than expected in the most recent quarter.
During the middle of the day, the stock TGT, -0.76% fell 1%, putting it on track to close at its lowest price since March 4. That came after a 2.1% drop on Monday, when Target said it would be lowering the prices of 5,000 “frequently shopped” items.
When Target announced the price cut two days before it reported its fiscal first-quarter results, investors seemed to worry that the company needed to boost sales at the expense of profits.
Target made a lot more money than expected in the fourth quarter because fewer items were marked down, which increased gross margins.
But Michael Lasser, a research analyst at UBS, said that Target’s stock still has a “buy” rating and that investors shouldn’t worry about when the company will cut prices. Lasser said that the cuts should be seen as a good thing in the long run.
As Lasser wrote in a note to clients, “these actions are seen as signs of strength, not signs of weakness.” “Most likely, the business has been making good margin gains that it can put back into the business.”
Even though 5,000 items might seem like a lot, Lasser said that the average Target store sells around 80,000 SKUs, or different items. The price cuts could only happen on about 6% of the store’s SKUs, he thinks.
If Target cuts prices by a certain amount, Lasser thinks that gross margins could be cut by 0.1 to 0.3 percentage points.
He thinks that Target’s margins will grow by 0.15 percentage points this fiscal year, which will lead to what he called a “conservative” earnings-per-share estimate of $9.45 for fiscal year 2024.
The current opinion on FactSet is that EPS will be $9.49 in 2024.
There may also be fears of a price war because Walmart Inc. WMT, +1.11% said last week in its earnings report that prices were lower than a year ago in a number of categories and that the number of grocery items whose prices were rolled back rose by 45%.
Lasser said it again: Don’t worry.
Lasser wrote, “We don’t think Walmart and Target’s actions will be that bad.” “Instead, they show that these stores are back to a steady-state margin rhythm where they can make small changes while still growing overall.”
So far this year, Target stock has gone up 9% and Walmart stock has gone up 23.3%. This year, the S&P 500 index SPX has gone up 11.3%.
What Wall Street thinks Target will say
FactSet polled 26 analysts and found that the average estimate for EPS for the first quarter of fiscal year 2019 was $2.06. This is up from $2.05 in the same time last year.
FactSet says that net sales will be $24.52 billion, which is 3.2% less than the same time last year. Same-store sales, on the other hand, are expected to grow by 1.5%, which would be the first rise in five quarters.
Ever since the beginning of the year, Target has beaten both EPS and same-store sales estimates. And the stock has gone up by an average of about 7% on the day that the last five earnings reports came out.
Since two quarters ago, net sales have only topped expectations twice. However, they have done so seven of the last eight quarters and 14 of the last sixteen quarters.
Target said in its fourth-quarter report that it thinks adjusted EPS for the full year will be between $8.60 and $9.60 and that same-store sales will drop between 3% and 5%.
