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Target posts big earnings miss, upbeat on holiday season

Yahoo Finance Live anchors discuss second-quarter earnings for Target.

Video Transcript

BRIAN SOZZI: All right, let's keep it rocking here. Here are three things you need to know right now. Shares of Target are getting hit after another tough quarter missing on both the top and bottom lines. Target's ticker page is also the hottest on the Yahoo Finance platform. I have a few things I'm fired up on about this report. So fired up, I'm going to stand up and read it right to camera.

First, wow that earnings miss. A miss like this is not normal for any company, especially a top name in retail and corporate America like Target. It shows how Wall Street has fully not grasp what target is doing to stabilize its business and how consumer mindsets have evolved this year. We saw a little bit of that mindset change in the retail sales data.

Second here, inventory up 35% year-over-year. That's despite aggressive markdowns in the quarter in areas like apparel and home goods. A lot of stuff to unpack there. And lastly, gross profit margins fell 890 basis points year-over-year. Like the earnings miss, not normal for a company like Target. And Brad, not normal really for any company in corporate America even considering stresses on the consumer and inflation.

BRAD SMITH: Right. So let's dive deeper into those TGT numbers and the brutal second quarter earnings. So Sozzi noted the bad misses on the top and bottom, the growing inventory concerns. But the company also reported a miss on same store sales, which grew just 2.6% year-over-year compared to estimates of a 2.8% increase here. So a ton to break down. You're taking a look at your screen the actuals versus the estimates here.

And as we were mentioning those comparable sales growth, it reflected only 2.7%, 2.7% in traffic growth as well. And so with all of what we've been watching with the mindset of the consumer right now, where they are trading down, where they are still shopping, and what categories they're still shopping, thank goodness target has groceries. Because if they didn't, where else would that foot traffic come into the store for?

BRIAN SOZZI: I was hoping you would have given me a second because I'm out of breath. I just ran from that side of the studio, but yeah--

BRAD SMITH: I got you moving again.

BRIAN SOZZI: I'm not getting any younger here, folks. But look, Target, I mean, $0.34 miss. I mentioned at the top, that is a huge disconnect from Wall Street is expected from really a Steady Eddie company under CEO Brian Cornell to what they have been doing the past two quarters.

This is the second straight material earnings miss from them. So you have target out there for the past three months aggressively marking down apparel and home goods inventory. That weighed significantly on margins. I am surprised that the stock is not down even more. So why is that? I was on a call last I was on a call with Target's CEO Brian Cornell and CFO Michael Fiddelke. They struck an upbeat tone for the back half of the season.

This is a management team that still thinks we're going to have a strong holiday season and a strong Christmas season. Maybe not betting a lot of inventory on that notion. But still, they're hopeful that the consumer is going to go buy out go out there despite gas price, despite inflation, and buy 30 gifts for their kids for the holidays.

BRAD SMITH: OK. Well, that's hopeful. But at the same time, you look at where the strength is right now, it is in food and beverage. It's in beauty, it's in household essentials. And one of the things that I continue to talk about, especially with the mindset of the consumer and how they will pick these little luxuries to continue to buy into things that are small costs that make them feel good when they are monitoring their spending within the household and perhaps trimming some of the fat elsewhere the excess in that discretionary spending, and it continues to be the beauty category.

I know you love to talk about Ulta as well. And we'll get to that a little bit later on in the show. But when you think about the categorical approach that they're going to have to take. And of course, they're looking into the holiday season because that's going to also help them in the household essentials. That's typically when you see the most buying activity from the consumer as well into making sure that they're prepped and stocked for all of the different parties or events that they may host in the home. That's going to be a larger question too.

You combine the COVID-19 pandemic that continues to be endemic at this point and the variants that are already expected to come cyclically now in the fall when we congregate more inside. That is also going to be a major question mark, I think, going into this winter about how much people are willing to spend to host some of those events knowing that the variants seasonally are something that they do have to be precautious around as well.

BRIAN SOZZI: No, a great point. Also, you mentioned Ulta. I did ask Cornell, how is the consumer responding to these new shops opening up? He said the sales have been very strong. In fact, that was probably the most optimistic I heard him when we caught up. So that is-- I would keep an eye on shares of Ulta today and some of the other cosmetics players.

Also too, we now have two different stories between a target and Walmart. Walmart came out yesterday, beat on earnings by $0.15. Struck, I would say, a little more hopeful tone on the back-to-school shopping season. Now, Target did say that back-to-school started solid, but maybe a little more optimism, better trends being played out at Walmart.

And the last but not least, I have to flag a tweet from a viewer of Yahoo Finance Live. It came at me this morning, and I think it was a very good point and offered to us a good teachable moment. Here is that tweet, "This is why you don't play earnings." And yes, you are a trader or investor, it is hard to invest in any nobody into an earnings report, especially if you are that retail investor and you have different levels of information compared to institutions.

You don't necessarily have access to the management team at a Target or many other companies. So yes, great point by our viewer there. It is very hard to trade any company in earnings, and especially retail right now with all this discounting.

BRAD SMITH: Right. And you never know, especially with the options activity that typically takes place around earnings periods as well. That can be-- if you are not willing to live with the result of where that company comes out and what type of trade that you've placed around that, that is a really scary scenario that some people could end up in considering the number of options that take place around an earnings scenario.

Also here just briefly while we wrap up Target, I want to mention Digital. Digital, an e-commerce, I have been continuing to talk about this, especially with Walmart, those sales grew 9%. That's following the growth of 9.9% last year. What that continues to tell us is that some of the growth is stalling out within the e-commerce investments that they've made.

And then same-day services, order pickup, drive up, shipped grew nearly 11% this year. Grew mid-teens, topped more than 80% last year. So all of that put together, I think it really gives you some type of inclination as to believe where they're going to invest further in Digital.

BRIAN SOZZI: Some type.

BRAD SMITH: Some type.

BRIAN SOZZI: Some type. Yeah,

BRAD SMITH: Exactly.