Target Q3 Earnings Preview: Modest Downside Risk With Margin Recovery Prospects

Target Corp TGT will be reporting third-quarter earnings premarket Wednesday before market hours.

The Street expects Target to report $1.48 in EPS and $25.31 billion in revenue for the quarter.

BofA Global Research analysts Robert Ohmes and Molly Baum see modest downside risks associated with Target’s third-quarter report. These include food-at-home inflation, potential ticket pressure from the company’s Affordable Joy initiative and other macro challenges impacting discretionary spending.

However, Ohmes and Baum also expect gross margins to benefit from freight and transportation cost recovery and the rollout and ramp up of flow and sortation centers. Traffic could improve on the back of the addition of Starbucks and returns to Drive Up and continued store remodels.

BofA maintained a Buy rating on Target with a $135 price target.

Target shares are currently trading near-about the bottom of their 52-week range ($102.93 – $181.70). Downside risks associated with the stock appear to be priced in already. With an improving margin profile, at a forward price multiple of 14.20, TGT bulls see a buy-the-dip opportunity.

Over the past year, the stock has experienced a significant decline of 36%, driven by cautious consumer behavior due to concerns about interest rates and inflation, along with backlash from shoppers over the company’s social positions. Back in June, the company decided to remove some products from its Pride Collection after facing customer backlash.

Related: Walmart Stands Firm on Pride Month Offerings Amidst Backlash, Despite Peer Target Backing Down

Q3 Analyst Focus: Analysts will be expecting to hear comments from the management on macro headwinds affecting most consumer discretionary stocks such as Target, Home Depot, Lowe's, Walmart and Macy's. These challenges to consumers include student loan payments, inflation and interest rates. What may also be in focus is Target’s margin profiles and improvements on that front.

Ratings & Consensus Estimates: Consensus ratings for Target stock stand at Outperform with a price target of $137.66.

TGT Price Action: Shares of Target stock were up 4.4% to $110.77 at the time of publication Tuesday.

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