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Target hit with 'drastic' cut from Jefferies for 4 reasons

Target stock could stay in the penalty box as the retailer aggressively sells slow-moving inventory and industry discounting picks up amid the economic slowdown, Jefferies analyst Stephanie Wissink warns.

Wissink, citing "profit warnings from peers & suppliers and pressure on discretionary wallets," slashed her EPS estimates on Target for the balance of 2022 and 2023 in a new note on Monday.

"The cut to our model appears drastic at face value, fully discounting Target's ability to bounce back to 6% operating margin in the second half and instead assumes: 1) inventory digestion takes longer; 2) discounts are deeper & competitive promotions intensify during back-to-school/holiday; 3) discretionary categories remain soft into second half with a shift to necessities; and 4) weekly variability in consumer behavior in response to +/- inflation makes forecasting difficult and suggests the need for more cautious inventory buys for 2H and 2023," Wissink wrote.

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.

Shares of the retailer are now down 29% so far this year, compared to a 14% drop for the S&P 500.

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 last week 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.

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

Bath & Body Works, RH, Bed Bath & Beyond, and Kohl's have also issued more cautious outlooks as consumers shift spending away from discretionary categories.

"I have never — maybe I don't remember — seen as much discounting with as much merchandise with high percents off," former Gap CEO Mickey Drexler told Yahoo Finance Live.

Signs point to sale items during the Black Friday sales event on Thanksgiving Day at Target in Chicago, Illinois, U.S. November 23, 2017. REUTERS/Kamil Krzaczynski
Signs point to sale items at Target in Chicago, Illinois on November 23, 2017. REUTERS/Kamil Krzaczynski

The dour news from retailers has some experts bracing for a post-holiday 2022 wave of retail bankruptcies, made worse if the economy enters a recession.

"I think we will see a flurry of bankruptcies likely in the first quarter of 2023 if this holiday season is anything less than completely robust," Mark Cohen, former longtime CEO of Sear Canada and current Columbia University professor of retail studies, warned on Yahoo Finance Live. "I don't think it will be, by the way."

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

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