(Bloomberg) -- Target Corp. shares soared after a surprising profit surge in the second quarter overshadowed the company’s increasingly cautious outlook on the rest of the year.
Adjusted earnings more than quadrupled during the quarter ended in late July, the retailer said in a statement Wednesday, reflecting progress in paring the bloated inventories that forced deep markdowns a year ago. That took the sting out of a sales decline, Target’s first in four years, and a cut to its profit outlook for the year as a whole.
The upbeat second-quarter performance underscored Target’s ability to navigate a slump in discretionary-goods purchases as consumers channel more spending to services and essentials. For a company that has been getting hammered in the stock market since early 2022, that counted as good news even as Target slashed its outlook.
“The positives for Target are the margin outperformance and inventory reduction, coupled with the fact that this is one of the most hated companies in all of retail (which means the bar is very low),” Vital Knowledge analyst Adam Crisafulli wrote in a note to clients.
The shares soared 8.5% ahead of regular trading in New York. Target sank 16% this year through Tuesday. For comparison, an S&P index of US consumer-staples companies fell less than 1% over the same period, while the S&P 500 Index rose 16%.
Pride Controversy
Revenue during the latest quarter took an extra hit from a controversy around Target’s Pride Month collection of LGBTQ-themed goods, which sparked protests from conservative activists and threatening behavior by some customers. That hurt sales in June, although business perked up in July and continued to recover in early August, Chief Financial Officer Michael Fiddelke said in a briefing with reporters.
New headwinds such as the resumption of student-loan repayments are likely to materialize in the coming months, Fiddelke said. But the company is showcasing its food and beauty offerings, which are still selling briskly.
“It’s prudent to be cautious right now,” Fiddelke said in a briefing with reporters ahead of Target’s earnings report Wednesday. “Student-loan payments will cause additional pressure on already strained consumer budgets.”
Adjusted earnings for the current fiscal year will be between $7 and $8 a share, Target said. The midpoint of $7.50 is 75 cents less than the average of the previous forecast range and is below the average analyst estimate of $7.81.
In the fiscal second quarter, adjusted earnings jumped $1.80 a share, compared with the $1.40 average of analyst estimates compiled by Bloomberg.
Comparable sales dropped 5.4%, worse than the 3.8% fall projected by analysts. The rise in demand for beauty products and food and beverages wasn’t enough to offset the weakness in many discretionary categories.
(Updates with analyst comment in fourth paragraph.)
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