Target Earnings sees TGT stock fall on EPS miss and inventory problems

• Target is set to report earnings on Wednesday before the market opens.
• The retailer last reported weak earnings that saw TGT stock drop sharply.
• Walmart has already held steady this quarter.

Update: Target (TGT) stock is down about 3% in Tuesday's premarket as the retailer missed earnings. Q2 EPS was $0.39, miles behind the $0.72 estimate. Revenue was $26 billion which was marginally behind consensus forecasts. The company said it was maintaining previously issues guidance for the remainder of the year. 

After Walmart (WMT) and Home Depot (HD) on Tuesday, Wednesday is the turn of another retail giant to report earnings. This time Target (TGT) is up before the open, and investors will be hoping that Walmart set the low bar and that all the bad news was out of the way last month. Last quarter Target and Walmart set alarm bells ringing when both warned about the detrimental effects of inflation on revenues and slowing inventories. Margin pressure was a noted feature last time out, so that will again be the main area of investor focus.

Also read: Walmart Deep Dive Analysis: Hold WMT to play defense vs upcoming US recession

Target earnings preview

Target is expected to post earnings per share (EPS) of $0.72 on revenue of $26 billion. That would mark a serious yearly decline in EPS of over 75%, even if it comes in line with consensus. Revenue forecasts are moderately higher than last year. Last quarter Q1 missed mostly due to cost increases along the supply chain. Some of these pressures have since abated, and it will be hoped that Target will produce a similar result.

Again here this is similar to Walmart. Target missed on earnings and then produced a subsequent warning in June. Target in our view more or less said it needed to dump its overhanging inventory by discounting aggressively. CNN reported in June that large retailers were considering paying customers to keep their return items as they did not want to add to already burgeoning inventory levels.

Target stock forecast

Target displayed a huge gap in the earnings miss, and this is still miles away from being filled. The key resistance is at the 200-day moving average of $205. Target is already up 25% in the past few weeks as the market has turned and investors bet that Walmart and Target have already laid out the worst-case scenario. Walmart has delivered as it matched its lowered forecasts, so expect the same from Target.

The reaction might be different this time however. The equity rally is beginning to slow, and Target is overbought on both the Relative Strength Index (RSI) and the Money Flow Index (MFI). The risk-reward trade for TGT stock is to the downside in our view.

TGT daily chart