Shares of Target (TGT -3.03%) were sliding in Thursday morning trading after the retailer disappointed Wall Street with its updated guidance for fiscal Q4. As of 10:50 a.m. ET, the stock was down by 3.2%.
For the fiscal quarter, which will end Feb. 1, management forecast that both GAAP and pro forma profits will come in somewhere between $1.85 per share and $2.45 per share. Unfortunately, according to data from Yahoo! Finance, Wall Street analysts had, on average, been expecting Target to earn $2.65 per share.
This means Target will probably “miss earnings” when its official report comes out in March. And this, in a nutshell, is why investors are selling Target stock.
Sales grow at Target
Target’s guidance update came in conjunction with its release of new data about the company’s sales performance during the November-December holiday sales season. Sales for those two months increased by 2.8% year over year, while same-store sales grew by 2%. CEO Brian Cornell described the results as “better-than-expected holiday-season performance,” and pointed to the retailer’s “continued traffic growth.”
Curiously, management noted that total traffic both in-store and online grew faster than sales did — up 3%. This suggests that while people were still shopping at Target, they weren’t buying quite as much as they did a year prior. This in turn implies that Target’s prices may be too high. That could spur the company to further discount its wares, which would hurt profit margins.
Is Target stock a buy?
Speaking of profits, Target’s prediction of earnings per share (EPS) of $1.85 to $2.45 in its holiday quarter implies the company will end fiscal 2024 with GAAP EPS of between $8.30 and $8.90.
With its stock price hovering just under $130, Target stock would therefore be trading somewhere between 14.6 and 15.7 times trailing earnings, which doesn’t sound expensive. Target’s dividend yield at its current share price is 2.9%, so anything north of 10% annual earnings growth should be enough to make Target stock a buy.
Problem is, even with the “better-than-expected” performance from November and December, Target expects no more than 1.5% total quarterly sales growth in its fiscal Q4. And if its profit margins come under pressure, profit growth shouldn’t be much better than that.
All things considered, I fear Target stock is not yet a buy.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.
