VSCO - Target sets cautious tone as investors eye rocky retail setup

Target ( NYSE: TGT ) gained 1.5% in early trading on Tuesday after some earnings jitters with investors faded away.

The Minneapolis-based retailer topped comparable sales expectations for the holiday quarter with a +0.7% gain, but warned on soft consumer spending trends as widely anticipated. On the earnings call, Target ( TGT ) execs said they are taking a cautious approach to this year's inventory commitments in many consumer discretionary categories. Some of the positive pullouts from the call were that the Food & Beverage and Essentials/Beauty businesses are still strong and TGT's higher starting wages is attracting new employees. On the capex front, Target ( TGT ) expects to spend $4B to $5B this year.

On Wall Street, Morgan Stanley analyst Simeon Gutman pointed to the slower path to margin recapture for Target ( TGT ) vs. market expectations. Gutman said achievability depends on whether investments are required to get back to 6% EBIT margin or if it's simply the lapping of markdowns and a more typical product mix. While guidance seems derisked to set a a path to potential upside, Morgan Stanley expects the stock to tread water in the near-term, especially given the difficult backdrop and the uncertainty over the pace and timing of margin recapture.

Bank of America made note of the 3.6% drop in digital comparable sales for Target ( TGT ), which was the first reported year-over-year decline since at least 2013. "In addition to difficult e-comm comparisons (given outsized Covid gains), we believe TGT also faces increased competition as other retailers including Walmart improve their Omni-channel offerings and execution," updated analyst Robert Ohmes. BofA maintained a Neutral rating on the view that TGT’s strong omni-channel execution, improving inventory position, and discount store decade exposure will likely be overshadowed by discretionary challenges such as incremental mix pressures, potential margin structure impairments from higher costs relative to TGT’s weaker same-stores sales outlook.

There were modest share price gains in the retail sector in a possible reaction to the better-than-feared Target ( TGT ) report. Abercrombie & Fitch ( ANF ) +2.5% , Ollie's Bargain Outlet Holdings ( OLLI ) +2.4% , Victoria's Secret ( VSCO ) +2.3% , Big Lots ( BIG ) +1.9% , Urban Outfitters ( URBN ) +1.9% , Dollar Tree ( DLTR ) +1.4% , Dollar General ( DG ) +1.2% , and Best Buy ( BBY ) +0.8% were some of the retail names in positive territory on a down overall day for the market.

See the details of the Target earnings report.

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