Target Corp., which struggled with inventory issues in 2022, is now reaping the benefits of improving gross margins, say analysts.
“After a difficult 2022, when Target was one of the more highly visible examples of the inventory glut that plagued retailers last year, the benefits of being cleaner were notable in the 1Q23 report,” wrote D.A. Davidson analyst Michael Baker, in a note released Wednesday. “This includes improving gross margins, off of a low base, better free cash flow trends, and the open-to-buy to lean into some potential areas of upside in the back half.” D.A. Davidson reiterated its buy rating and $193 price target for Target.
Target’s
TGT,
first-quarter gross margin rate was 26.3%, compared with 25.7% in the same period last year. In a statement, the company said this reflected the benefit of lower freight costs, retail price increases, lower clearance markdown rates, and lower digital fulfillment costs driven by lower digital volume and a favorable mix of lower-cost same-day services.
Related: Target stock swings to a gain as an earnings beat helped offset a downbeat near-term outlook
“F1Q23 performance was better than expected, with EPS coming in above expectations, driven by gross margin upside (important aspect in the margin recovery story),” wrote Raymond James analyst Bobby Griffin in a note released Thursday. Raymond James reaffirmed its strong buy rating and $190 price target for Target.
The retail giant’s stock ended Wednesday’s session up 2.6%, outpacing the S&P 500 index’s
SPX,
gain of 1.2%. Target shares are up 0.2% in premarket trades Thursday.
Related: Target battling inventory ‘shrink’ caused by theft and organized retail crime, says CEO
Discretionary spending was another key theme of Target’s first-quarter results, with the retailer noting continued softness in its discretionary categories. However, the retailer is seeing strength in its “frequency” businesses of beauty, food & beverage and household essentials.
Strong revenue and expense management drove Target’s EPS beat, according to Jefferies analyst Corey Tarlowe. “Food and Beverage, Beauty, and Household Essentials continue to show nice momentum, traffic was positive in the quarter, and we see ample margin recapture opportunity for 2023 for TGT,” Tarlowe wrote in a note released Wednesday. Jefferies reiterated its buy rating and $191 price target for Target.
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“TGT outlined a more price conscious consumer consistent with previous trends as consumer spend evolves toward essentials amid macroeconomic pressures,” wrote TD Cowen analyst Oliver Chen, in a note released Wednesday. “TGT saw a continued increase in the mix of in-store sales vs digital sales as consumers prefer in-person shopping.” TD Cowen had an outperform rating and $200 price target for the retailer.
Of 35 analysts surveyed by FactSet, 20 had an overweight or buy rating, and 15 jad a hold rating for Target.
This story originally appeared on Marketwatch
