Target (TGT, Financial) surged 12% after reporting impressive Q2 results. The company broke its streak of five quarters without significant EPS beats, delivering a notable EPS beat in Q2. Revenue rose 2.7% year-over-year to $25.45 billion, surpassing expectations. Target also provided strong guidance for Q3, with EPS projected at $2.10-2.40, and raised its full-year EPS outlook.
- Q2 same-store comps increased by 2.0%, with in-store comps up 0.7% and digital comps up 8.7%, hitting the high end of prior guidance. This marked the first positive comp after four declines. Traffic grew 3% year-over-year, with all six core merchandising categories showing traffic growth. Same-day services saw double-digit growth, led by Drive Up and Target Circle 360 same-day delivery.
- Target saw improving trends in discretionary categories, especially in apparel, where new designs and value were incorporated. The All In Motion activewear brand grew in the low-teens. Beauty also stood out with 9% comp growth in Q2. Food & Beverage and Essentials saw traffic growth as consumers responded to Target's value offerings.
- Comp growth was driven entirely by traffic in stores and digital channels. In May, Target lowered everyday regular prices on about 5,000 frequently shopped items, boosting store traffic. Looking ahead, Target guided Q3 comps at +0-2% and reaffirmed full-year comps of +0-2%, expecting the increase to be in the lower half of that range.
- Q2 operating margin improved to 6.4% from 4.8% a year ago and 5.3% in Q1, aided by merchandising activities and cost improvements that offset higher promotional markdown rates. Target aims for continued margin expansion, potentially exceeding the 6% annual rate seen before the pandemic.
- Target's view of the consumer remains consistent. Consumers show resilience despite challenges, focusing on value to manage household budgets. While they shop around holidays and seasonal moments, many delay purchases until necessary.
Overall, investors are reacting positively to Target's large EPS beat and impressive operating margin expansion. The return to positive comps and bullish outlook on discretionary categories are significant positives. Unlike Walmart (WMT, Financial), which has a higher exposure to groceries, Target benefits from improved trends in discretionary categories, which is encouraging for investors.
