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Analyst: Sell Target stock into earnings

·Anchor, Editor-at-Large
·2 min read

Target's stock has rallied 16% in the last month as plunging gas prices have made Wall Street more optimistic about the retailer's profit potential in the back-to-school and holiday shopping seasons.

But the advance may be too much, too soon, according to Evercore ISI Analyst Greg Melich, given the lingering economic challenges U.S. households are still facing. The analyst slapped a "negative tactical call" on Target's stock ahead of the retailer's Aug. 17 earnings release.

"We think the recent stock run is a reflection of a 'de-risked' 2Q print [earnings release], with a very depressed 2% EBIT margin reflecting write offs and progress in getting through the excess inventory," Melich said in a note to clients. "Yet our concern is that margins are likely to remain under pressure into second half 2022, ultimately questioning the earnings power quickly recovering to $12+ in 2023 which appears to be quickly pricing into the stock nearing $170."

Despite the one-month rally, shares of the retailer are still down around 27% so far this year, compared to a nearly 12% drop for the S&P 500.

The pullback hasn't been without good reason.

Target kicked off concerns about the retail sector's health in June with a surprising decision to liquidate massive amounts of slow-moving inventory and take a more cautious view on near-term profits.

Since Target's warning, other retailers have issued similar bad news to investors.

Walmart, the world's largest retailer, slashed its second-quarter and full-year profit outlooks owing to rampant inflation and a consumer retrenchment for discretionary items such as apparel. Walmart sees full-year earnings tanking 11% to 13% compared to a prior estimate for a 1% drop.

Bullseye, Target stores' mascot dog, is posed for photos from the floor of the New York Stock Exchange, Wednesday, July 21, 2010, after opening bell ceremonies in New York marking the opening of the Target's first store in Manhattan. (AP Photo/Richard Drew)
Bullseye, Target stores' mascot dog, is posed for photos from the floor of the New York Stock Exchange, Wednesday, July 21, 2010, after opening bell ceremonies in New York marking the opening of the Target's first store in Manhattan. (AP Photo/Richard Drew)

Best Buy followed suit with a warning of its own, and analysts chimed in that Best Buy's outlook paints a "bleak" picture ahead for the electronics retailer.

Specialty retailers such as Gap and Bed Bath & Beyond have also warned on profits, leaving many Wall Street analysts to brace for more bad news when earnings begin hitting next week.

"It seems to me the best thing you can do right now is reset the bar," BMO Capital Markets Analyst Simeon Siegel said about retailers on Yahoo Finance Live (video above). "The best thing you can do on guidance right now is just gut it."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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