Thursday, November 18, 2021

Target’s Q3 Hits Bullseye, But Stock Gets Shorted

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News shaping
the markets today

     

What’s happening: Shares of Target Corp traded lower on Wednesday, despite the company reporting upbeat results for its third quarter.

What happened: Apart from reporting strong results, Target boosted its sales guidance for the holiday season, driven by early Christmas shopping.

Investors grew concerned, however, with the big-box retailer recording a decline in one of its key profit metrics.

How were the results: The Minneapolis, Minnesota-based retailer reported double-digit growth in its sales for the third quarter.

  • Total revenues surged 13.3% year-over-year to $25.65 billion, topping the consensus estimate of $24.78 billion.
  • Adjusted earnings came in at $3.03 per share, beating market expectations of $2.83 per share.

Why it matters: Big retailers have been giving their best to prepare for the crucial holiday season by chartering their own container ships to bring goods into the US well ahead of time, amid several roadblocks, including shipping delays, raw material shortages and the closure of factories in some parts of the world. Target’s inventory level was up over $2 billion year-over-year ahead of the shopping season.

The company has held prices of its products low, despite inflation hitting record levels, to drive sales. Target’s comparable sales climbed 12.7% in the third quarter, versus 20.7% growth last year. Its store comparable sales grew 9.7%, while digital comparable sales jumped 29%.

However, Target’s gross margins contracted 260 basis points year-over-year to 28% for the quarter, while operating margins shrank 70 basis points to 7.8% due to higher transportation and labour costs.

Target reported cash and equivalents worth $5.7 billion as of October 30, 2021, while inventory increased 40.4% to $14.9 billion, versus $10.65 billion as of January 30, 2021.

“With a strong inventory position heading into the peak of the holiday season, our team and our business are ready to serve our guests and poised to deliver continued, strong growth, through the holiday season and beyond,” CEO Brian Cornell said.

Management guided to between high-single-digit and low-double-digit growth in comparable sales for the fourth quarter. The projection for operating income margin was held at 8% or more for fiscal 2021.

How shares responded: Target’s shares plummeted 4.7% to close at $253.80 on Wednesday, following the release of quarterly results. The stock has jumped around 43% year to date.

What to watch: Traders will closely monitor Target’s sales during the all-important holiday season in the US. Investors will also keep an eye on gross margins with the company choosing to not pass on the increase in costs to customers.

The Markets Today

     

Crude oil will be in focus today after WTI prices declined below the key $80 level on Wednesday.

Context: Oil prices fell on Wednesday, following warnings from the IEA (International Energy Agency) and the OPEC (Organization of the Petroleum Exporting Countries).

Details: The IEC and OPEC warned about the oversupply of oil in the market, which is expected to exert further pressure on oil prices going ahead.

Oil traders also remained concerned about Europe recording a new wave of covid-19 cases, which has forced some governments to reimpose restrictions.

Traders have also been weighing the prospects of the release of oil from the SPR (Strategic Petroleum Reserve) by the US administration. Markets grew concerned on reports of the US asking the Chinese government to release oil reserves in a bid to lower oil prices during the virtual meeting between Biden and Xi Jinping.

On Wednesday, the EIA reported a decline in US crude inventories by 2.1 million barrels for the week ending November 12, below the consensus estimate of a 2.5 million barrel decline. The American Petroleum Institute had reported a gain of 655,000 barrels on Tuesday.

WTI crude for December delivery fell $2.40, or 3%, to $78.36 per barrel on the NYMEX on Wednesday, settling at its weakest level since early October. January Brent crude shed $2.15 to close at $80.28 per barrel on ICE Futures Europe.

The EIA also reported a weekly inventory decline of 700,000 barrels for gasoline and of 800,000 barrels for distillate supply. December gasoline fell 7 cents to $2.28 a gallon, while December natural gas settled at $4.82 per million British thermal units, down 36 cents on Wednesday.

What to watch: Traders await the release of natural gas stockpiles data from the EIA. Working gas held in storage facilities in the US, which rose by 7 billion cubic feet in the week ending November 5, is expected to grow by 25 billion cubic feet in the latest week.

Rising covid-19 cases remains a major concern for markets, with total global infections surpassing 255.6 million.

Other Markets: European trading indices closed mostly higher on Wednesday, with the DAX 40, CAC 50 and STOXX Europe 600 up by 0.02%, 0.06% and 0.14%, respectively, and the FTSE 100 down by 0.49%.

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Futures at 0400 (GMT)

What else to watch today

     

European Union’s passenger car registrations, Bank of Indonesia’s interest rate decision, South Africa’s value of recorded building plans and South African Reserve Bank’s interest rate decision, Central Bank of Turkey’s interest rate decision, Canada ADP employment change, foreign investment in Canadian securities and Canada investment in foreign securities, America’s initial jobless claims, continuing jobless claims, Philadelphia Fed manufacturing index, Kansas City Fed's manufacturing Index and CB leading index, as well as Argentina’s leading economic index.