Trading Target's Bearish Q2 Guidance: 'It's Bouncing Right Where It Should'

When a company comes out with bad news two times in only a few weeks, the issue does not necessarily act in the same manner.

That is certainly true for Target Corporation TGT, for which the potential price action was dissected on Tuesday’s PreMarket Prep show, making it the PreMarket Prep Stock of the Day.

Target's Last Bombshell: Before the opening May 18, Target dropped a bomb on investors with its first-quarter report. Not only did the retailer have a huge EPS miss with an EPS of $2.19 vs. the $3.07 estimate, but the company also announced it continues to expect low-to-mid single-digit revenue growth for FY22.

The reason for an operating margin rate of 5.3%, which was well below the expectations, was margin pressure reflecting actions to reduce excess inventory as well as higher freight and transportation costs.

In one of its worst sessions on record, the issue swooned from $53.67 ($215.28 to $161.61), or 25%. The issue did not find a tradeable bottom until four sessions later at $145.51.

Target's 4-Day Rebound, Drift Lower: The rally off that low peaked on May 27 at $167.20 and the high close for the rebond was posted on that day as well at $167.14. Since that day the issue has moved up and down with the broad market and ended Monday’s session at $159.67.

Here We Go Again: Before the opening on Tuesday, Target announced that it will miss the mark for second-quarter operating margins, as it forecast the figure will be around 2%. Target projects the rate will be back at around 5% for the back half of the year.

In addition, the company announced an updated 2022 plan focused on inventory optimization, with actions including additional markdowns, removing excess inventory and canceling orders.

PreMarket Prep's Take On Target: When Target was being discussed on Tuesday's show, it had already established its premarket low at $143.33 and had rebounded to the $146 area. The question that remained was whether or not to try and buy the dip.

Co-host Dennis Dick was amazed the company warned for the second time in 12 days. Yet he did expect the same shellacking the issue took before for one primary reason.

“This is trying to rectify the problem and it is bouncing right where it should, in the area of the low for the move,” he said. 

“This is it an easy set-up for me. It has already bounced, and if the former low the move holds ($145.51), I think the dip does get bought.”

The author of this article concurred with Dick that it was unlikely the premarket low would be revisited and that potential buyers would need to find an entry above that level.

For those investors looking for the rebound off the low to continue, Target needed to clear $148.62, which had capped the rebound for the time being.

TGT Price Action: After a much lower open ($148 vs. $159.67), the issue continued lower. It immediately bottomed well ahead of the premarket low as well as the former low of the move at $147.15 and sharply reversed course.

The stock ultimately lost 2.44% Tuesday, closing at $155.98.

The discussion on the issue from Tuesday’s show can be found here: