Target Saves Christmas With Earnings Beat

U.S. Consumers can bend, but they'll never break

Despite a second-straight quarter of sales declines, Target managed to beat expectations and keep earnings alive. The stock is up big and the market has hope for retailers moving forward. 

WHAT HAPPENED

Target notched $25.4 billion in revenue for Q3. While that's a 4% decline from last year, Target managed to trim costs enough to generate a huge beat on earnings--reaching $2.10 EPS when The Street expected that number to fall all the way to $1.48. The earnings beat here alone was enough to bring investors back to the stock. 

SOFTER LANDING 

Basically, despite the fact that same-store sales fell 5% YoY, Target managed to get it's inventory problem from last year way more under control. Inventory levels fell 14% YoY, which is a huge cost saver. More importantly, Target is showing that even though consumer demand is softening, people are more likely to delay purchases instead of foregoing them entirely. Discretionary spend is still low, but trends are improving enough that management has some confidence that Target can get back to positive sales growth in 2024. 

WHY IT MATTERS

Investors have been waiting for the other shoe to drop regarding consumer spending for a while. A big slowdown in consumer spending would signal that the Fed's supposed 'soft landing' is turning into a full-blown recession. While we're finally seeing retail sales slow here in the states, it's not nearly as bad as predicted. If these trends stay light enough, we can actually thread the needle of beating inflation while avoiding a recession. Combined with yesterday's CPI print, the market has nothing but bull sentiment for retail based on Target's earnings. Target stock rose over 10% at market open, but the retailer still has a long way to go in order to recover from being down 26% on the year.