Hit target with ‘drastic’ cut by Jefferies for 4 reasons

The target stock could remain in the penalty box as the retailer aggressively sells off late inventory and industry discounting increases amid an economic slowdown, warns Jefferies analyst Stephanie Wissink.

Wissink, citing “profit warnings from peers and suppliers and pressure on discretionary wallets,” cut its EPS estimates at Target for the rest of 2022 and 2023 in a new note on Monday.

“The cut in our model looks drastic at face value, fully reducing Target’s ability to recover to a 6% operating margin in the second half and instead assumes: 1) inventory takes longer to digest, 2) markdowns are deeper and competitive offers intensify during back-to-school/holidays, 3) discretionary categories remain soft in the second half with a shift to needs, and 4) weekly variability in consumer behavior in response to inflation +/- makes it difficult to predict and suggests the need for more cautious stock purchases for 2H and 2023,” Wissink wrote.

Target sparked concerns about the health of the retail industry in June with a surprise decision to liquidate huge amounts of slow-moving inventory and take a more cautious view of near-term profits.

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

Following Target’s warning, other retailers have issued similar bad news to investors.

Walmart, the world’s largest retailer, cut its second-quarter and full-year earnings outlook last week as runaway inflation and consumers cut back on discretionary items such as clothing. Walmart sees full-year profit in the range of 11% to 13%, compared with a previous estimate of a 1% decline.

Best Buy followed suit last week with a warning of its own, and analysts said 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’ve never seen—maybe I don’t remember—so many sales with so many heavily discounted merchandise,” former Gap CEO Mickey Drexler told Yahoo Finance Live.

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

Signs show for sale items at Target in Chicago, Illinois November 23, 2017. REUTERS/Kamil Krzaczynski

The dismal news from retailers has some experts bracing for a wave of retail bankruptcies after the 2022 holidays, exacerbated if the economy slips into recession.

“I think we’re going to see a flurry of foreclosures probably in the first quarter of 2023 if this holiday season is anything less than completely robust,” Mark Cohen, former CEO of Sear Canada and now a retail professor at Columbia University, warned Yahoo. Finance Live. “I don’t think it will be, by the way.”

Brian Sozzi is editor-in-chief and Anchor on Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and up LinkedIn.

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