Target’s price cuts pay off with big beat, stock soars 16%

Key points

• Target stock soared 16% on Wednesday amid impressive Q2 financial results.

• The firm also raised its guidance for the remainder of FY24.

• We examine how investors should interpret these developments.

Target (NYSE: TGT) stock jolted 16% higher on Wednesday morning on the heels of second-quarter 2024 earnings beat and guidance raise.

The big-box retail chain reported adjusted earnings of $2.57 per share, up 40% year over year from $1.80 in the year-earlier quarter, beating Wall Street’s consensus estimate by $0.39.

Furthermore, Target’s Q2-2024 revenue grew 2.7% year over year to $25.5 billion, slightly beating the analysts’ consensus estimate of $25.02 billion, while the company’s operating income increased 36.6% to $1.6 billion.

Additionally, Target’s margins improved, with the company’s operating income margin rate coming in at 6.4% versus 4.8% in the year-earlier quarter and Target’s gross margin rate increasing to 27% to 28.9%.

Analysis: Cost-cutting strategy pays off

With such impressive quarterly data, Target CEO Brian Cornell could assuage investors’ concerns about the company’s price-cutting strategy. “We feel great about the reaction that we’re seeing from the consumer based on the 5,000 items where we’ve seen price reductions,” Cornell assured reporters in a call.

Moreover, the CEO declared that Target’s price-cutting strategy “certainly contributed to traffic growth during the quarter” — we expect that to continue over the balance of the year”, and that the firm expects the trend to continue throughout the year.

Notably, Target’s traffic (measured by number of transactions) grew 3% in Q2 of 2024. That’s a huge improvement over the 4.8% decline in traffic in the year-earlier quarter.

Another sign that Cornell’s turnaround efforts are working is Target’s 2% year-on-year comparable sales increase. This is “at the high end of the Company’s expectations,” Target reported, and bucks an unfavorable trend after four consecutive quarters of comparable-sales declines.

According to Yahoo Finance, Cornell declined to say if more price cuts were coming. It’s possible that he won’t continue reducing Target’s product prices if this strategy eats into the company’s margins, which, as previously mentioned, improved considerably in Q2.

On the other hand, Cornell and Target probably don’t want to rain on the market’s parade as TGT stock flies higher and price cuts seem to boost the company’s sales.

As Bank of America analyst Robbie Ohmes explained in a note to clients, “Target’s heightened focus on value positions it well for [market] share gains going forward including improving price gaps and several new owned brand launches focused on value and entry level price points.”

Moreover, according to The Wall Street Journal, Cornell observed in a call with reporters that shoppers “remain focused on value.” Also, the CEO teased in Target’s quarterly report that the firm is focus on providing “the unique combination of newness and value that consumers can only find at Target”.

Still, it remains to be seen whether Target continues its path of slashing product prices in the coming months.

Target guides for a strong year of profits

Another reason investors cheered Target’s quarterly press release is that the company raised its full-year 2024 GAAP and adjusted EPS outlook. Target’s previous guidance called for earnings of $8.60 to $9.60 per share, and currently the company expects to earn $9.00 to $9.70 per share.

For the current quarter, Target guided for GAAP and adjusted EPS of $2.10 to $2.40. This might seem like a letdown compared to Target’s $2.57 per share in Q2.

Let’s keep the data in perspective, though. If Target’s EPS soared 40% year over year in the second quarter, it’s understandable if the company’s earnings normalize somewhat in Q3.

In any case, Target stock could still have room to run as it’s still below its 52-week high of $181.86, even after Wednesday morning’s share-price pop.

Going forward, investors should monitor closely to see if Cornell and Target continue to focus on value for consumers — and, just as importantly, whether Target’s product price cuts end up weighing on the company’s margins sooner or later.